Late Hits on Cisco

In a classic display of hindsight, a small squadron of stock analysts rushed to belatedly downgrade Cisco this morning after the company announced earnings for its fiscal second quarter below expectations last night. The experts at CSFB, Morgan Stanley, Robertson Stehpens, Lehman Brothers, and SG Cowen, among others, are part of the revised-outlook pack, unhelpfully informing investors that they’re less optimistic about CSCO now that it’s fallen more than 10 percent at the open.

This wouldn’t be remarkable—downgrades frequently come too late to be of any use—except that Cisco has in the past had a record of making things incredibly easy for analysts. The company is famous for its “guidance,” which is the Wall Street word for “hinting at what the numbers will be,” and in fact had reportedly beaten consensus expectations by precisely one penny per share for 14 straight quarters before yesterday. That’s a pretty astonishing record. So what went wrong this time? Did Cisco fail to use the correct smoke signals, nudges, winks, and other kabuki moves of the guidance game? Has the economy deteriorated so quickly that the company and analysts alike were caught flat-footed? Or was something else at play here?

Cisco’s CEO, John Chambers, had actually made a number of public statements in January that were widely interpreted as attempts to talk down expectations. Business was “a little bit slow,” “challenging,” “a challenge,” the next quarters looked “cloudy,” and “we will not be immune” from a slowdown, etc. The Wall Street Journal’s “Heard on the Street” column at the end of last month focused on how Chambers “appeared to be trying to reduce expectations for Cisco without explicitly acknowledging as much.” The skill here, of course, is getting your message out without causing your stock to plummet; one stock analyst quoted in the story called Chambers’ performance on that score “brilliant.”

Given all this, the curious thing is that after Chambers’ early January remarks, the consensus earnings estimate for the second fiscal quarter actually rose, from 18 to 19 cents a share. (Cisco reported 18 cents yesterday.) Many analysts apparently thought Cisco wouldn’t really slow down until its third and fourth quarters. I realize that Wall Street analysts are everyone’s favorite punching bag these days, but really, increased earnings hopes in the midst of all the pessimism of recent months, pessimism that Chambers himself participated in, seems especially lame. If these analysts were stocks, they would have fallen 10 percent or more this morning. And then someone would have shown up to hit each one of them with a belated downgrade.