Streetwise for Jan 17,  2010

Streetwise

Lauren Rudd

Sunday, January 17, 2010

It's Earnings Season Once Again

A recent marathon of old Twilight Zone reruns reminded me that we are once again entering another earnings season. We will shortly hear how companies did in 2009, and more importantly what their outlook is for the year ahead, a Twilight Zone if there ever was one.

As you listen to various forecasts, keep in mind that rose colored glasses, combined with a dollop of wishful thinking, can create just as deadly a forecast as that provided by the prognosticators of doom. So do you ignore the various protestations? Absolutely not, just keep them in proper perspective.

Regardless of how the current earnings season shakes out, understand that Wall Street is often ornery and cantankerous. Yet, if you look at a graph of the major stock indexes over the past 40 years, you will see an undeniable trend upward. However, indexes fluctuate over time and those fluctuations can become dramatic.

For example, the 10-year return for the S&P 500 is a negative 22.9 percent. While that return is disappointing, nobody should be buying an S&P 500 index fund and holding it for 10 years. To do so will place you solidly in the Twilight Zone. Furthermore, because an index of 500 stocks did not perform well does not mean that every company within that index was a loser. In fact, just the opposite is true. Many of those companies performed well over the past 10 years.

As you dig out from the avalanche of data that accompanies every earnings season, remember that the Street’s analysts have a herd mentality and that their opinions and advice may not coincide with your investment philosophy and objectives. Furthermore, it is impossible to determine with any accuracy a company’s future from its past share price history. There is absolutely no “relationship.”

Does that mean you ignore historical financial data? Absolutely not; because that is really all you have to work with. However, you need put the data in proper perspective. In other words, your goal with historical data is to gain confidence...confidence in a company and its management going forward.

One company that has been creating confidence, and an incredible accumulation of cash, year after year is Cisco. When I last wrote about the company a year ago, my earnings projection for the company’s 2009 fiscal year was $1.39 per share with a 12-month projected share price of $18, for a potential capital gain of 14.6 percent over its 2009 closing price of 15.79.

For 2009 fiscal year ended July 25, Cisco earned $1.35 per share after eliminating one-time expenses, such as those resulting from acquisitions. Given the environment for computer hardware sales in 2009, Cisco turned in an excellent performance. Furthermore, this fact was not lost on the company’s shareholders who have bid the share price up to where it recently closed at 24.64, resulting in a one-year gain of 56 percent.

Cash flow from operations for fiscal 2009 was $9.9 billion, compared with $12.1 billion for fiscal 2008. Cash and cash equivalents were $35.0 billion at the close of fiscal 2009, compared with $26.2 billion at the end of fiscal 2008, and $33.6 billion at the end of the third quarter.

For its first 2010 fiscal quarter ended Oct. 24, Cisco earned $1.8 billion, a 19 percent decline from earnings of $2.2 billion during the same period a year earlier. Earnings per share fell to 30 cents in the quarter, down from 37 cents a year ago. Sales also declined, coming in at $9 billion, down from $10.3 billion the previous year.