Welcome to the June issue of Condor Monthly! In "What's New at Condor Capital," we announce the hiring of Jeanette Lucas. In "From the Portfolio Manager" this month, we examine Cisco Systems, Inc. Finally in this month’s "Financial Planning Corner," we present some interesting statistics and discuss recent trends in interest rates.
What's New at Condor Capital
Condor Capital is pleased to announce the hiring of Jeanette Lucas as a financial analyst. Jeanette is a graduate of Rutgers Business School in New Brunswick, NJ with a degree in Finance. She is a member of the investment committee, where she shares her research on current holdings and potential investment opportunities for inclusion into the clients' portfolio. She also handles portfolio administration duties and works with the Corporate Service team by conducting qualitative mutual fund analysis. Please join me in welcoming her aboard!
From the Portfolio Manager
Cisco Systems, Inc. (CSCO)
Cisco dominates corporate data networking from end-to-end. Cisco has more than 50% share in routing/switching and greater than 90% share in a number of key midrange segments of the corporate router market. Customers prefer well established, trusted vendors and are loath to switch to an unproven vendor. Cisco’s end-to-end solutions allow it to integrate additional functionality into its routers and switches such as Voice-over-IP (VoIP) capability and security features. This helps insulate pricing pressures and pulls sales of additional products. Cisco is positioned for growth, as it added 25-30% (about 1,475 people) to its sales organization over the last year. Meanwhile, quotas are up on existing sales people. Cisco is emphasizing new emerging markets, such as Eastern Europe and Latin America, for growth.
The scale and breadth of Cisco’s product line drives its industry leading margins and cash flow. Cisco spent more on research & development in 2004 than rivals Nortel, Lucent, and Juniper combined. Top line growth should average 10% over the next 5 years. Cisco’s dominant position and exposure to growth markets should allow its growth to exceed the growth of the total communication equipment market, which is estimated to be around 2-4%.
Cisco is moving into a number of high growth markets such as security, storage, wireless networking, and Voice-over-IP (VoIP), where it is the # 1 or # 2 player. Analysts estimate that the VoIP market should grow at 30% per year for the next 10 years as firms replace all their outstanding TDM telephony systems with IP systems as they reach their normal 10-year replacement cycle. Enterprises typically deploy VoIP when their current telephony infrastructure is almost fully depreciated. While the total telephony market may not grow, the IP telephony portion is expected to grow rapidly. Most customers are moving to VoIP due to operating expense efficiencies = VoIP has a lower total cost of ownership than old TDM systems.
Cisco moved into the consumer video and home entertainment markets with its recent $6.9 billion purchase of Scientific Atlanta. This makes sense as video is an increasingly important component of service providers’ networks. Cisco’s CEO, John Chambers, believes analysts’ projections may be conservative when they estimate the market will grow to at least $4.5 billion a year by 2010, from a couple hundred million now. Web TV (Internet Protocol Television or IPTV) service is a system that will deliver customized programs, such as letting people in different towns watch a movie together. Chambers views video as the “killer application” which will drive spending on next generation gear. For example, watching a movie in high-definition creates the same amount of traffic on the Web as 300,000 emails. As networks get loaded up, some customers expect the size of their networks to triple on demand for combined video, voice, and data services. Some analysts predict 95% of US households will have high-speed Internet by 2020. Equipment providers will be the clear beneficiaries. Just 5% of Cisco’s sales came from consumers last quarter, compared with 45% from large businesses, 25% from small/mid sized companies, and 25% from cable and phone providers.
Cisco’s IPICS (IP Interoperability & Collaboration System) technology could result in billions of revenue potential. IPICS inter-connects different proprietary walkie-talkie radio systems. It allows push-to-talk between different radios as well as VoIP phones, Wi-Fi radios, and laptop clients. This interoperability need is clear from the communications failures of 9/11 and Hurricane Katrina. IPICS does not require users to upgrade or replace any radios or other hardware in the field – it just requires an IP-based network that has IPICS servers/hardware and the IPICS management suite. Two-way radio is already an $8-10 billion market worldwide. Obvious applications include public safety and military, with significant potential in other applications like airports, ports, oil platforms, mines, retail, and building security. IPICS could help drive sales of other Cisco gear, most notably its VoIP phones, which can be set up to work as push-to-talk radios. IPICS could also drive demand for Cisco’s new IP security cameras and video recording gear. For instance, New York City plans to install security cameras across its entire subway system.
Internet Protocol version 6 (IPv6) could be a boon for Cisco. A research organization has come out and said that we’ll run out of IP addresses by 2012 if we don’t start the switchover to IPv6 now. This means swapping out most of the existing infrastructure which would be neither cheap or easy. This would be a phenomenal event for Cisco.
People started talking about running out of IP addresses back in the mid-1990’s, but some stop gaps were developed to get around some of the major problems. While some say we’ll never need to switch to IPv6, millions upon millions of cell phones and other “junk” uses of IP are chewing up addresses. Additionally, IPv6 will also make it easier for the development of IPTV and other multimedia services. According to a government mandate, all federal offices must be able to send and receive IPv6 by 2008. Some consultants are saying this transition could be even bigger than Y2K. It’ll certainly be interesting to see how this plays out.
Overall, we believe exposure to these new high-growth technologies will be the primary driver of Cisco’s long-term growth.
Financial Planning Corner
Stat Bank
In the last 2 years, the Federal Reserve's Open Market Committee has raised the Fed Funds Target interest rate 17 times. As recently as May 2004, rates were only 1%. Including the FOMC's decision to raise the Fed Funds rate at the end of June, they have slowly raised rates to the current 5.25%. The Fed is giving mixed signals regarding their next course of action, but the rationale for raising rates at a "measured pace" is to slow economic activity and keep inflation under control without throwing the economy into a recession. Of course, we are positioning our client's accounts accordingly.
Some other interesting statistics:
| 1 | Ranking of America among 42 countries for highest percentage (22 percent) of citizens who have no money left after paying essential bills and spending discretionary dollars (ACNielson) |
| 5 | Million senior citizens that are financially abused through investment scams (SEC) |
| 6 | Percent of income donated to charity in 2004 by households with $500,000 or more investment assets (Spectrem Group) |
| 9 | Number of affluent families out of 10 that will lose their fortune by end of the third generation (Christian Science Monitor) |
| 16 | Percent of GDP spent on healthcare versus 13.4% in 1997 (US Health & Human Services) |
| 45 | Percent of husbands that think their wives care about saving for retirement, while 68% of women say they care (Money) |
| 49 | Percent of wives that say they would like to be involved in managing household finances, but only 32% of men felt that their wives liked this job (Money) |
| 57 | Percent of workers that feel they are underpaid, but less than 20% really are underpaid based on job market data (Salary.com) |
| 68 | Percent of wives claim they share household financial decision-making responsibility, while only 48% of men agree (PNC Financial) |
| 83 | Percent of wives that feel it is important for both partners contribute to household finances, but only 65% of men agree (PNC Financial) |
| 345 | Dollars in billions, the IRS estimates Americans underpaid in taxes due to errors or intentional avoidance (IRS) |
| 1,200 | Number of mutual funds that merged or were liquidated in 2005 (Marketwatch) |
| 1933 | Last year prior to 2005 that Americans' personal savings rate feel below zero for a full year (Associated Press) |
Source: Journal of Financial Planning (April 2006, June 2006)
"The sports car and sailboat are investments for my retirement.
I'm using them to attract a younger woman who can support me in old age."
