Cisco Resilient to Japan Disaster
Japan is one of the largest economies globally, and therefore any disruptions raise alarms outside of the island nation as well. In this context, we look at how Cisco (NASDAQ:CSCO) might be impacted given Japan’s large technology presence. Cisco competes with Juniper (NYSE:JNPR) and Alcatel-Lucent in the network equipment business.
We present our quick take on Cisco in the context of the recent terrible events in Japan. We believe that Cisco will be resilient due to the below factors.
Supply Disruptions Not Significant For Now
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While the disaster has directly impacted companies with manufacturing facilities in Japan, its indirect effect for companies situated internationally comes in the form of supply shortages of components and lower sales in the Japanese market. In particular, production disruptions are mostly impacting the core electronics business and the networking equipment’s situation is likely to be better. Network World states that: [1]
Components impacted are those used widely in the consumer electronics marketplace, and in laptops, PCs and servers: NAND flash memory, dynamic random access memory (DRAM), microcontrollers, standard logic, liquid-crystal display (LCD) panels, and LCD parts and materials, according to IHS iSuppli.
Japan is Small Business Segment for Cisco
Although Japan has higher margins, its revenue contribution to Cisco’s business is low. The company mentions in its earnings transcript that its total gross margins ranged from about 62.9% for the Asia-Pacific region and emerging markets to about 71.1% in Japan for Q3 of fiscal year 2010. [2]
However, Japan accounts for just about 3% of Cisco’s revenues and the growth in the region has slowed in the recent past. [2] Even if the business in Japan slumps for an extended period of time for Cisco, it won’t impact earnings meaningfully. Additionally as Japan looks to rebuild its infrastructure, the equipment required could help make up for the lost sales. Cisco could potentially use this opportunity to increase its penetration in this market allowing it to expand its reach and potentially improve profit margins.
See the complete $24.20 Trefis price estimate for Cisco’s stock.
Notes:- Cisco stock hit by Japan quake, Network World, Mar 15 2011 [↩]
- Cisco’s earnings transcript [↩] [↩]