My earlier post was more a lament that I haven't done a discounted free cash flow for Cisco recently. Going over the recent annual report, it was clear to me that the earnings are fairly understated relative to the large non-cash charges Cisco is taking.
That being said, pro-forma earnings are probably a much closer proxy. I'd have to twiddle with the line iterms to really see.
In terms of discount rate, there is a "correct" answer, at least text-book. However, it is very arguable what risk premium to give the market right now, what beta to give Cisco, and even what the risk-free rate is. I'd probably feel more comfortable with a spread of these rates so we could see what assumptions you have to believe before Cisco looks valued properly. It would be a good exercise to do.
In terms of the options gains, I could not help noticing that the line item for "tax benefits due to option exercises" was almost as large as net income for 2000 (check the operating portion of the cash flow statement from the 2000 annual report).
I personally don't see a real problem with Cisco's equity management to date. I mean, I remember the literal furor over the Cerent acquisition last year. Now, the $6.9b in equity looks like nothing to pay for $1b+ in revenue this year, $3b potentially next year (according to the last conference call)
I'd prefer to first get an enterprise valuation, and then we can all play monday morning quarterback in terms of dilution, acquisitions, debt, etc.
I should probably check around the different analyst reports to see if I can dig up a recent DCF. |
