Cisco Systems Joins Dow Industrial Average

Cisco is becoming part of the Dow Jones Industrial Average. As far as I know it is remaining in the NASDAQ 100 for a time as well. The NASDAQ 100 is my favorite hunting grounds for new investments. Cisco's promotion to the DOW illustrates why.

I have been posting summaries of Cisco's analyst conferences since November of 2006. Now I'm going to stop. It is not that Cisco has become a poor investment. I expect Cisco to continue to be a technology leader, and a growth stock, for the foreseeable future. But I can only cover a limited number of stocks. Cisco is very well covered by the news media and other analysts, and as a DOW stock will receive even more attention. I watched it because it gave insight into Internet connectivity trends. I also often considered buying the stock, but it never became enough of a bargain for me, compared to the stocks I bought.

Note that Cisco is entering the Dow at one of the worst moments in its history. In the most recently reported quarter, revenues were $8.2 billion, down 10% sequentially from $9.1 billion and down 17% from $9.8 billion year-earlier. Net income was $1.3 billion, down 13% sequentially from $1.5 billion, and down 24% from $1.8 billion year-earlier. EPS (earnings per share) were $0.23, down 12% sequentially from $0.26, and down 21% from $0.29 year-earlier.

Yet that is not bad compared to most of the technology industry. Given the state of the economy, it is remarkable that Cisco is selling that much equipment. It is mostly capital equipment, which tends to stall during downturns.

In early 2008, we now know with hindsight, Cisco's management was overly optimistic. They thought their broad array of products, global reach, and tendency to rapid growth would mean a recession would just cut into their growth rate. They did not admit to revenue declines until they actually occurred. That said my impression is that management is very honest with investors. They just underestimated the severity of the crisis that was building. I did that too.

As of last report, the demand for Cisco products was stabilizing. Given the need to bringing high speed broadband Internet to more of the world, and the increased use of the Internet for video, I think Cisco's prospects are bright.

There is not much left of the old industrial economy in the DOW. But I think there is still hope for manufacturing in the United States, if Americans get back to working hard and being satisfied with global pay levels. U.S. executives are even more overpaid than their European and Asian counterparts. According to standard market economic theories, that has to change, or American manufacturing will continue to fail.