Cisco Systems merits a 'buy,' though boom years are over

Taking Stock

Your Money

July 04, 2004|By ANDREW LECKEY

I AM 27 years old, consider myself an aggressive investor and add a significant amount to my portfolio on a regular basis. I own shares of Cisco Systems Inc. What is the outlook for the company?

- T.D., via the Internet

The world's largest maker of equipment that directs Internet traffic is so confident that the economy and capital spending are improving that it plans to hire 1,000 workers through the rest of 2004.

It recently launched its much-ballyhooed CRS-1 router that targets its largest customers. This high-end product with a starting price of $450,000 will do battle against a popular Juniper Networks router introduced two years ago.

In addition, Cisco Systems just bought some assets of equipment-maker Procket Networks Inc. for $89 million in cash to expand its engineering team.

But though the net income for its most recent quarter rose 23 percent because of increased demand for its networking products, those results didn't knock anyone's socks off. There is still skepticism as to how the recovery will actually affect corporate spending on technology.

The explosive growth that the company enjoyed in the booming 1990s is unlikely to return. Equipment demand is volatile and difficult to forecast, even though Cisco dominates corporate networking. It accounts for 85 percent of global router sales and 50 percent of Ethernet switches. One-third of its total sales are outside North America.

Shares of Cisco (CSCO) are down slightly this year, after a gain of 85 percent last year. Cisco's board recently authorized the repurchase of as much as $5 billion in company stock.

The consensus recommendation on Cisco shares is a "buy," according to the First Call research firm in Boston. That consists of 13 "strong buys," 14 "buys," 13 "holds" and one "sell."

In a recent filing with the Securities and Exchange Commission, the company acknowledged that the cost of expensing its employee stock options in its financial accounting would have cut profit in its most recent quarter by one-fourth. Critics say options inflate earnings because companies don't count them as a business expense, while Cisco contends there is no consistent method for valuing options.

Cisco earnings are expected to rise 25 percent in 2004, vs. the 123 percent increase forecast for the communications equipment industry.

I am 41 years old and just starting a Roth individual retirement account. Should I get a "load" or a "no-load" fund? What should I look for in a Roth IRA fund?

- J.F., Cromwell, Conn. Load funds require a commission, while no-load funds are commission-free.

While fees do cut into returns, what really matters is a fund's return after commissions are taken into account.

The structure of load funds, generally bought through a broker or financial adviser, can be: (1) a front-end load with commission varying from 3 percent to 6 percent, (2) a gradually declining back-end load when shares are sold or (3) a level load paid annually.

"What you're basically paying for in a load fund is the advice of the broker who sells you the fund," explained Marilyn Capelli Dimitroff, a certified financial planner.

Most load funds also charge annual distribution fees for promotional costs, called 12b-1 fees, that can be 0.25 percent to 0.75 percent of asset value. While some no-load funds also charge 12b-1 fees, those that don't are deemed true no-loads.

At your age, Capelli Dimitroff advised, look for long-term growth with reasonable volatility because you'll have the fund a long time.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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