MEDIA WATCH: Cisco downgrade signals trouble to many, opportunityto some

Tech stocks have been rattled recently as investors wonder to what extent the economic recovery has begun to lift the battered sector. Recent weeks have seen a number of tech bellwethers subjected to intense scrutiny as the earnings season approaches and investors wonder which companies might issue earnings warnings.

Tech stocks have been rattled recently as investors wonder to what extent the economic recovery has begun to lift the battered sector. Recent weeks have seen a number of tech bellwethers subjected to intense scrutiny as the earnings season approaches and investors wonder which companies might issue earnings warnings.

In the wake of IBM's first profit warning in a decade, media coverage has depicted the markets as jittery. When word spread that RBC Capital Markets, a unit of Royal Bank of Canada, had lowered its profit estimates for Cisco, the networking giant saw its shares begin to sink 8% to a five-week low.

According to media accounts, news that RBC had cut its third-quarter estimates led to rumors that Cisco would issue a profit warning. A financial analyst gave CNNfn (April 10) an idea of the edgy market that Cisco's IR and media relations departments face: "I think it's wildly anticipated now that Cisco could be the next one to pre-announce."

A number of articles addressed the bigger picture of the state of corporate IT spending. A financial analyst on CNBC (April 9) stated, "I think it's a big question whether or not the rebound or the economic recovery in tech has taken hold.

This was seen by some as the real question on investors' minds, and everything else would flow from there.

USA Today (April 10) agreed with this sentiment, writing, "Investors are worried that the dearth of spending on tech equipment will drag on, delaying a profit rebound."

A number of reports indicated that Cisco's policy is not to comment on market rumors, so its hands were tied as far as trying to clarify its intentions - if in fact it did know whether or not it was going to meet its estimates.

But coverage noted that Wall Street rushed to Cisco's defense. In particular, Merrill Lynch was widely recognized for saying that Cisco was "unlikely

to make a pre-announcement. TheStreet.com (April 10) cited Merrill's views that Cisco "is executing effectively in a poor IT-spending environment."

There were also a few forecasts in the media coverage envisioning that Cisco would continue to face profit warning rumors and speculation for the next several weeks. Reuters (April 9) quoted a financial analyst as saying, "I would not be surprised by rumors up until they report. There are enough negative data points to fuel that fire."

A few reports positioned the dip in Cisco's stock as a good buying opportunity.

Credit Suisse First Boston was among those cited for recommending Cisco, saying, "If our bottom line numbers are correct, investors should make money from here

(CBS MarketWatch.com, April 10).

The general impression conveyed by the media is the recognition that IT spending is still stuck in low gear. These reports suggest that companies such as Cisco are just not encountering a return to more extravagant tech spending that was seen in the heyday of the late 1990s. However, while this may be devastating for some companies, several reports noted that industry leader Cisco will eventually see the light at the other end of the tunnel, whereas some competitors may not survive the downturn.

Evaluation and analysis by CARMA International. Media Watch can be found at www.carma.com.

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