Cisco Systems
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Cisco Value

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By babyfrog
June 18, 2003

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From the research i did i figured csco to be a solid company.

Oh yes - I wholeheartedly agree. CISCO is a very solid company. It is the market leader in its business. It has managed to expand its margins, even during a downturn in the tech arena, and in the router space, anyway, "You can't get fired for buying CISCO" is about as common as "You can't get fired for buying IBM" was in the mainframe space, back when that mattered.

Now - that being said, there's a difference between a solid company and a reasonably priced company. And right now, there is very little actual evidence to indicate that CISCO is reasonably priced right now.

Consider the following numbers, from CISCO's 10-Q (Quarterly Report) filings, as provided from Free Edgar.

Quarterly, Year Over Year information, for the quarters ending in April:

(Amounts in millions, except per-share amounts)
                   2003         2002      2001      2000
Net Revenues      4,618        4,822     4,728      4,933
R&D Expenses        725          838     1,028       727
General and
Administrative      184          164       195       156

What we can see here is that CISCO's revenues are in a general downward trend - not exactly the hallmark of a growth company. Additionally, their R&D expenses are also in a downward trend, which does not bode well for future growth off of the next 'latest and greatest' must have product. Save for a spike in 2001, CISCO's "general and administrative" expenses are trending upwards, which is not what you want to see in a company that is actively shrinking.

Now - CISCO reported a better earnings number in the April, 2003 quarter than it did in the April, 2002 number ($0.14 per share, versus $0.10 per share, the year before). But taking a look at the quality of those earnings, and things start to look - well, ugly.
Balance sheet comparison - April 2002 vs. April 2003:

                 2003             2002
Cash & Equiv    3,940            9,484
Receivable      1,157            1,105
Total Assets   36,256           37,795
Liabilities     8,600            9,124
Shareholders   27,645           28,656

Hmmm... Less cash on hand. More accounts receivable (even though revenues are down), and lower overall assets??? None of those are exactly signs of a strengthening company. Granted, total liabilities are down, but shareholders' equity fell further, indicating that any assets used to pay down the liabilities were poorly spent. CISCO could have taken all their cash in 2002, paid off their total liabilities, and been in a better position than they are now. Given that they didn't, I have to wonder where the money went... Perhaps into financing the share buyback from their options grants? You know - the ones that steal shareholders equity and hand it directly to John Chambers and his management team, for doing the excellent job of shrinking CISCO.

Oh - and let's not forget my favorite, from the "Cash Flows" statement:

Net Cash Flows from operations:
2003:  3,691
2002:  4,978

So, while Cisco may have reported better earnings in the April, 2003 quarter than the equivalent in 2002, those better earnings did not come from its operating activities. Ouch.

Being such a solid corporation what is it going to take to get csco back into a nice price range?

By that i mean into the 20's, 30's or even 40's.

Now, you're really asking a valuation question... What is the company worth? Well, a lot of that has to do with the answer to the question of how does the company expect to do in the future? Well, according to the data provided by the Fool, Cisco expects to earn about $0.59 per share this fiscal year, and $0.64 per share next fiscal year. About 8.5% more next year than this year. Hmm... At the current price of $17.98, that gives CISCO a PE ratio of about 30.5. At an estimated 8.5% growth rate, which seems aggressive - given CISCO's recent habit of shrinking - that gives CISCO a PEG ratio of almost 3.6 ... Not exactly cheap.

So to answer your question - what will it take for CISCO's price to go up? -- The answer is any of the following:

1) Improving fundamentals for the company. - Stronger revenues, actual dividends, new products, etc.
2) The cessation of the stock options grants that serve to either drain shareholders' equity or dilute their ownership.
3) Another suckers' bull rally into the 'magic' of high tech stocks.
4) Further Governmental intervention (interest rate drops, Fed treasury buybacks, the elimination of any investment taxes at all) that will make investing seem that much more attractive.
5) Some random hiccup in the market.

Yeah - Cisco can go up, but I certainly would not be betting on it happening any time soon - not based on what the company's reported data is telling me...


Disclosure: I have no position in CISCO. Its performance defies my ability to analyze the company...

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