Tony, since you mentioned CSCO, here's an analysis of CSCO and the prospects for the stock going forward [all emphases mine] :
If I look at one of the bubble darlings, Cisco, I see a prime
example of the disconnect between real limits to growth and
current market pricing. I saw CSCO's CEO in a profile last night
that portrayed him as the #1 CEO in America. I have no doubt
that the company makes good products (I use their routers), that
the employees are for the most part happy, and that it is
actively staying at the leading edge of communication
interconnect technology through acquisition, etc.
Nonetheless, when the CEO states a ten-year goal of tripling
sales, I have to wonder about the pricing that gives it a
trailing P/E of 170, a forward P/E of 145 and a Price/Sales
around 35x. With current sales per share of $1.89, how can this
be a $73 stock? If we assume that the CEO's sales goals are met,
and further assume that every dollar of increased sales falls to
the bottom line at the current gross margin level of 65% (net
pretax margin is 28%), then CSCO will be making less than $3 per
share in ten years if share dilution stops today. Even with all
these generous assumptions which stretch credulity (especially
the lack of dilution), the company will still have an earnings
yield below T-bills or savings accounts ten years from now, if
the price just stays where it is. In the mean time, today's 10-
year Treasury Note will grow by 77% over that period with coupon
reinvestment at the current yield.
Maybe the investing public knows something the CEO doesn't.
However, I just can't see a society in the future which spends a
quarter or half of its total gross income on communications
equipment. In sum, I think anybody who bought CSCO over the past
few months will be very lucky to break even over the next 20
years or so, and that they are almost certain to underperform the
investors who put their money in Money Markets or T-bills.
If anybody can point out any fallacies in the above argument, I will be interested. Of course, I am inclined to agree rather than disagree with what it says. |
