Cisco Grows at Internet Speed; J&J; Keeps Getting Healthier

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Cisco Systems (CSCO)

Jim: This is one of those stocks that everyone wishes they’d bought several years ago, Mike. Cisco is one of Nasdaq’s superstars, having skyrocketed 26-fold in just the last five years on the strength of the company’s stupendous growth. And the shares have split eight times in the last nine years.

Mike: This is the type of stock that, every time it has a pullback, some people think it’s finally peaked--but the rest of the world thinks it’s a great buying opportunity.

Jim: And I’m with the rest of the world. Now Cisco, of course, is the world’s largest maker of the equipment that routes computer traffic over data networks--namely the Internet.

Mike: Right, I see Cisco as sort of a United Parcel System or Federal Express type of play. We assume the Internet and networking are going to be the medium of the future. Now, it’s impossible to know which companies on the Internet will be successful, but there’s no question that the companies that enable everyone else to be on the Net--the ones that deliver the data--are going to thrive. And the prime player there is Cisco.

Jim: Exactly. This company already has exploded in size in tandem with the Internet’s usage. The other day, Cisco posted its results for its fiscal year ended July 31. Earnings jumped 35% to $2.6 billion as revenue soared 43% to $12 billion. And I think Cisco’s savvy CEO, John Chambers, and his team deserve credit for managing that kind of growth.

Mike: Cisco to me is a company that rebukes those investors who think they’ll be ahead in the new-media age by only picking stocks of companies that are first in their businesses. Cisco was not first, but look at it now.

Jim: Who was first?

Mike: You had a number of others, such as 3Com Corp., which was founded by an inventor of computer networking. Now it’s an also-ran to Cisco. Lucent Technologies was in many of these businesses early. They’re now all eating Cisco’s dust.

Jim: Since we mentioned Chambers’ management, we should talk about Cisco’s approach to acquiring new technology.

Mike: Basically, Cisco buys a lot of it. It’s been a vigorous acquirer of technology firms, and that’s essentially a way of having other firms do Cisco’s research and development. It waits for small, well-managed companies to come up with new technology and then brings them on board.

Jim: Assuming it’s technology Cisco can use.

Mike: Right, Cisco is a master at this. And in fact, Lucent has taken a page from Cisco’s book and is doing the same thing.

Jim: Speaking of which, we talked about Lucent recently and how data and voice transmissions will increasingly be sent over the same networks in the future. Which naturally is bound to put Cisco, Lucent and a host of others on a collision course.

Mike: No question, they’re going to be battling each other for shares of the same markets, though they’re approaching it from different sides--Cisco coming from the data side, Lucent from the voice side. It’s anyone’s guess whether they or others will ultimately prevail, but to me it’s an easy bet that Cisco will emerge as one of the one or two big players.

Jim: Agreed. To me, Cisco is like Cindy Crawford. I mean, if we spent a long time looking really closely at either of them, we’d undoubtedly be able to find something wrong. But otherwise, what’s not to like?

Mike: That’s some recommendation.

Jim: The only question one need ask about this stock is: Do I buy it today or wait for a pullback to buy it a tad cheaper? It’s true that Cisco commands a premium price. Now in the mid-60s, it’s trading for a rich 66 times its expected fiscal 2000 earnings per share. But I wouldn’t wait.

Mike: Me neither.

Jim: Buy it now, because I don’t see any slowdown in Cisco’s sales or earnings growth to warrant standing around. Especially because the concerns about the year 2000 bug, which some feared would slow Cisco’s sales if companies delay technology spending, now seem to be ebbing.

Mike: Well, God bless it if Y2K does cause a sales slowdown, because that would lead to a hit in the stock price--and then we’ll have a great opening to buy more shares.

Look, whatever happens with the Y2K bug, it’s going to be a temporary problem. And when it’s behind us, Cisco will be poised to roar ahead yet again.

Johnson & Johnson (JNJ)

Jim: This company, of course, is the venerable maker of consumer health-care and personal products like Tylenol, Band-Aids, Neutrogena soap and Johnson baby products. It’s also a big maker of prescription drugs.

Mike: Right, it’s got this stable of pharmaceuticals with names that, well, only your health-care professional knows what they mean. You know, names like Aciphex and Resolor.

Jim: Gesundheit. Johnson & Johnson also makes lots of medical equipment, especially orthopedic products.

Mike: The hardware that ends up in your body.

Jim: That’s right. Put it all together--the company’s pieces, I mean, not the hardware--and Johnson & Johnson has annual sales of nearly $24 billion and 100,000 employees worldwide. And its stock has been a great, steady performer for the last five years running, beating the bellwether Standard & Poor’s 500 index by plenty.

Mike: That’s true despite the fact that some investors periodically get worried that Johnson & Johnson’s growth rate might be in danger of slowing.

Jim: True. Some look at Johnson & Johnson’s three markets--consumer products, drugs and medical equipment--and fret that the company isn’t big enough in all three to maintain its strong growth.

I think the opposite is true. The three legs of that stool give Johnson & Johnson nice balance and diversity to keep growing at double-digit rates.

Mike: You could see that in this year’s second quarter.

Jim: Right, when Johnson & Johnson’s profit rose a better-than-expected 15% from a year earlier on a 19% gain in sales.

Mike: And we haven’t even talked about the real excitement surrounding Johnson & Johnson these days, which has something to do with margarine.

Jim: Nice segue, and you’re right. The company recently got U.S. approval to market Benecol, a cholesterol fighter, and Johnson & Johnson has begun introducing it as a margarine and in other dairy spreads.

Mike: People are bullish about it, with good reason. Benecol was developed in Finland, and margarines there that contain the bad-cholesterol-fighting ingredient--something called stanol ester--sell for five times the price of ordinary margarines. Yet they’ve seized something like 90% of the market there.

Merrill Lynch recently estimated that Benecol margarine took 2.4% of the U.S. margarine market within four weeks of its roll-out in May.

So as an investor, I’d be pretty excited--which might make my blood pressure go up, but at least my cholesterol will be coming down.

Jim: I would definitely buy this stock too. Besides Benecol, Johnson & Johnson just obtained co-marketing rights for an antidepressant called Vestra, which has good growth prospects. Then there’s the big takeover the company just announced.

Mike: Centocor Inc.

Jim: It’s the biotechnology company Johnson & Johnson is buying for about $5 billion. Centocor has several promising drugs in development that would treat things like arthritis and heart disease. And Centocor already has hot-selling drugs such as ReoPro, an anti-clotting medicine.

Mike: Johnson & Johnson is a pretty easy call for me. This is a well-managed company with a strong history of delivering the goods. Plus, at around $100 a share its price-to-earnings multiple is about 33 based on estimated 1999 earnings per share of $3, which is not out of line for this blue-chip stock.

Jim: It’s not exorbitant at all, and it’s worth paying. Johnson & Johnson also has a very clean balance sheet with modest long-term debt. And while Wall Street worries about slowing sales of some other drug companies’ major products, some of Johnson & Johnson’s existing drugs are doing extremely well, including Procrit for anemia and Risperdal for schizophrenia.

Mike: And to top it off, its medical-equipment division, which includes orthopedic, wound-closure and other products, struggled a bit in 1998 but has come back strong this year, with sales jumping 20% in the second quarter.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear excerpts of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Cisco Systems

Monday: $65.75

Johnson & Johnson

Monday: $101.31