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| The Basics | Cisco vs. Sysco: A business-plan duel
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You wouldn't buy a business without studying it, would you? The same should go for a company's stock. We'll explain our 9-part scorecard by pitting Cisco vs. Sysco.
By Harry Domash
Let's say you quit your day job and decide to buy a local business. I doubt youd base your buying decision solely on how fast the business is expected to grow. Instead, you'd probably learn as much as you could about what the company did, how it did it and whether it could continue doing it, profitably, in the future.
It's akin to how Warren Buffett evaluates a stock: He proceeds as if he were buying the whole company (something he's been known to do). It's a smart way for anyone to assess stocks.
But most individual investors dont. Unlike the Oracle of Omaha, they don't have a clue about how to analyze a company's business plan.
Thats easily fixed. I've developed a simple scorecard to help you evaluate nine essential business-plan keys. To illustrate, let's compare Cisco Systems (CSCO, news, msgs) to Sysco (SYY, news, msgs). One, Cisco Systems, is a well-known brand in a high-profile sector with a stock that has lost 75% of its value over the past five years. The other, food-service supplier Sysco, is a relatively obscure company in a stodgy-sounding industry. Its shareholders have enjoyed a 123% return over five years. (To be fair, if you look back 10 years, Cisco's shares have gained 805% vs. Sysco's 565% return).
For each business-plan factor, a company can earn one point if it has an advantage or lose one point if its at a disadvantage compared to its competition. Thus, possible total scores range from 9 to minus-9.
Brand identity: More than just a name
When youre talking about digital music players, sodas or computer printers, consumers will pay up for an iPod, a Coke or an HP LaserJet, even if a lesser-known or generic brand is as good or better.
The lesson is clear: Companies marketing the strongest brands usually enjoy higher sales and better profit margins than their competitors.
Cisco is the dominant name in the networking business. Competitors probably need lower-priced products to take business from Cisco. Score one for Cisco.
Sysco, although the biggest player in the food-service business, has less than a 15% market share. And Sysco is a distributor, not a manufacturer, so brand is not a factor. Sysco gets no point here.
Score: Cisco 1, Sysco 0
Distribution: Squeezing onto the shelves
Supermarket shelves are full. Launch a new cereal, and there's no room to display it without displacing an existing brand. Kellogg (K, news, msgs) and its competitors employ legions of salespeople to make sure that doesn't happen.
Lack of access to distribution channels can cripple new players. Score one-point for the likes of Procter & Gamble (PG, news, msgs), which controls distribution channels by virtue of its vast array of brands. Subtract one point when firms have to compete with behemoths like P&G.
Cisco and Sysco sell most of their products using their own sales forces directly to end users, so locked-up distribution channels are not an issue for Cisco or Sysco, so both score zero points.
Score: Cisco 1, Sysco 0
Product life: When staying power doesn't help
Its easy to put off purchases of long-lasting items such as automobiles, calculators or furniture when times are tough. But its another story for office supplies, food, toothpaste and other health-care items, which are used up quickly and must be replaced.
I doubt that Oracle, for example, stopped buying staples and printer paper when its customers slashed their software budgets in 2000-2002.
Clearly, companies selling short-life products have an advantage, at least in a soft economy. Since its easy to put off upgrading telecom networks when business is slow, Cisco loses a point in this category. Sysco gets a point because it sells only short-lived products.
Score: Cisco 0, Sysco 1
Pricing: How to keep them coming back
Similar to the reasoning for product life, companies selling cheap items have an advantage in tough times over firms with expensive products. For instance, consumers might put off buying a computer, but not a handheld calculator. Companies might spring for a stapler, but make do with worn desk chairs.
Here again, Cisco sells relatively expensive products and gets docked. Sysco, which sells affordable wares, adds one point.
Score: Cisco -1, Sysco 2
Revenue predictability: No surprises, no regrets
No matter which way the economy is heading, insurance companies, cable-TV operators, credit-card processors and other firms with stable client bases have predictable revenue streams.
Conversely, firms selling semiconductors, computer software and fashionable or trendy items (think George Foreman grills) have unpredictable revenue streams.
Companies with predictable revenues may not be as exciting, but they can better plan their growth.
Cisco, with revenues dependent on its customers capital spending decisions, again gets shut out. Although elements of the restaurant business suffer in a weak economy, I gave Sysco a point for this category because its customer list also includes hospitals, schools, retirement homes and hotels.
Score: Cisco -2, Sysco 3
Customer count: More buyers, less risk
You dont need an MBA to realize that having just a few customers is risky business. Obviously, firms with small customer bases can take a serious hit if only one customer switches to a competitor. But theres more. Important customers can insist on lower prices, squeezing profit margins. Firms selling mostly to the likes of Wal-Mart Stores (WMT, news, msgs) or Costco (COST, news, msgs) are vulnerable.
Give one point to companies with thousands of customers, zero to those with a few hundred customers. Subtract one point if fewer than 10 customers account for 50% or more of total sales.
Cisco and Sysco both sell to thousands of customers, and thus score a point each.
Score: Cisco -1, Sysco 4
Product cycle: Long-lasting flavor, profits
The product cycle is the length of time that a product can remain on the market before it must be replaced by a newer version. Companies with short product cycles run the risk of product obsolescence and must continuously develop new products. Almost all tech companies fall into this category.
By contrast, chewing gum and candy maker William Wrigley Jr. (WWY, news, msgs) can wring decades of sales out of a Juicy Fruit or a Big Red.
Cisco is a short-product-life company, so it loses one point in this category. Sysco is not a manufacturer, so it gets no score.
Score: Cisco -2, Sysco 4
Product diversity: Hedging the bets
Unforeseen events can kill the sales of almost any product, so companies selling only a few products are riskier bets than those selling thousands of different items. Give one point to companies selling at least 50 different products (not different models of the same product) and subtract one point from those selling fewer than five different products.
Cisco is a judgment call in this category. It sells far more than 50 different products, but most of them can be classified as network routers and/or switches. Nevertheless, I awarded Cisco one point because of its wide product variety. Sysco, which sells thousands of products, also garnered one point.
Score: Cisco -1, Sysco 5
Industry diversity: Slumps can be contagious
Anyone who bought telecom equipment stocks before the bubble burst can attest to the risk of buying stocks selling to a single industry. Shareholders of Cisco, Nortel Networks (NT, news, msgs), and Lucent Technologies (LU, news, msgs) all suffered when phone companies almost simultaneously shut down spending for new equipment.
Similar risks apply to firms serving any single industry such as airlines, hospitals and hotels. Award one point to companies serving diversified industries and subtract one point if a company serves a single industry.
Cisco, despite a relatively narrow product line, sells to almost every industry, and thus earns one point. Sysco sells to only the food-service industry. However, that industry bridges into so many other business that I didnt think Sysco should be penalized. Consequently, Sysco gets no points and no deduction.
Final tally: Cisco 0, Sysco 5
Cisco scored better than many tech stocks Ive checked. Because of the short product life spans and intense competition, techs typically record negative scores.
I dont recommend using the business plan score as a stand-alone pass/fail test. It doesnt tell the whole story. You must still research and understand a firms future growth prospects.
Eastman Kodak (EK, news, msgs), for instance, with its lock on the U.S. film and photo processing market, would have scored highly a few years back. But the company was done in by technological changes that made its major product line obsolete.
Rather than using the business-plan score in isolation, I recommend using it for comparing companies with similar growth prospects. On that count, Cisco and Sysco come out nearly equal. According to MSNs Earnings Growth Rate report, for the next five years, analysts are looking for 14.9% average annual earnings growth from Cisco and 14% from Sysco.
Harry Domash does not own or control any of the stocks mentioned in this column.
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