Foolish Forecast: Cash Flow Cisco

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Wish you could relive the halcyon days of the Internet Bubble? Tomorrow could be your lucky day, when erstwhile Internet darling and still-reigning router regent Cisco Systems (Nasdaq: CSCO) reports its first quarterly earnings of its fiscal 2006.

But analysts aren't too sanguine on the company's chances to wow them this time. At last report, the consensus of the 20-odd analysts following Cisco is that it will report just over 14% earnings growth in comparison to the year-ago first quarter. Fiscal Q1 2005 saw Cisco earn $0.21 per diluted share. Tomorrow, expectations are for the company to report $0.24. Good results, to be sure, and if the company can achieve them, investors should be pleased. But they're not at all the kind of growth numbers that generated rock star-stock status for Cisco back in the late 1990s -- or even the 40% net profit growth that the company posted for fiscal year 2005 (reported last August).

Absent the prospect of supercharged growth numbers, what should investors look for from Cisco tomorrow? First and foremost, the company has recently been busy reversing course on its stock-diluting ways of the previous millennium. August's earnings report revealed that in fiscal Q4 2005, Cisco repurchased 130 million shares -- about 2% of shares then outstanding. That sounds good, until you realize that the company paid an average of $19.14 for each share repurchased, but the company's stock now fetches less than $18 per stub. If Cisco felt its shares were a good investment at $19.14, one would hope to learn tomorrow that the company plowed even more of its massive free cash flows into buying at the even cheaper prices available during fiscal Q1 2006.

Speaking of cash flow, Cisco generated $6.0 billion in free cash flow last year, which is a modest decline from the previous year's $6.2 billion (Cisco being a "serial acquirer" of companies, I calculate its free cash flow as not just cash from operations minus capital expenditures, but also minus cash spent to acquire new businesses.) More important than the company's GAAP profits results, therefore, investors should assure themselves that free cash flow approximates (or preferably, exceeds) the company's "accounting profits." The two numbers were nearly identical last year, a deterioration from fiscal 2004, in which Cisco generated nearly $900 million more in cold, hard cash than the GAAP profits. Ideally, tomorrow's report will show a reversal of that trend.

Fortunately, Cisco is one of the "good guys" -- a firm that includes a full cash flow statement with each earnings release. If its free cash flow situation has improved, you'll find this fact laid out in black and white near the bottom of tomorrow's press release.

Here at the Fool, we recently held a knock-down, drag-out duel over Cisco. Relive it in:

• Dueling Fools: Cisco Bull
• Dueling Fools: Cisco Bear
• Dueling Fools: Cisco Bear Rebuttal
• Dueling Fools: Cisco Bull Rebuttal

Fool contributor Rich Smith does not own shares in Cisco.