Hi Hueyone, John, and thread. After much reflection, I
think I buy into John's calculation of Free Cash Flows.
Based, on his calculation, I redid my forecast and came to
some conclusions that may surprise John. Instead of just
taking half a year's FCF, I went back a little further and
here's what I found:
Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 1st Half 02 Total
Net Income 456 913 1,049 1,350 2,023 2,668 (1,014) 392
Depr & Amort 75 133 212 327 489 863 2,236 935
Amort of In-Process R&D - - 273 436 379 1,279 739 25
Subtotal 531 1,046 1,534 2,113 2,891 4,810 1,961 1,352
Purchased PP&E (152) (283) (330) (415) (602) (1,086) (2,271) (482)
Free Cash Flow 379 763 1,204 1,698 2,289 3,724 (310) 870 10,617
Sales 2,233 4,101 6,452 8,489 12,173 18,928 22,293 9,264 83,933
Free Cash Flow/Sales 17.0% 18.6% 18.7% 20.0% 18.8% 19.7% -1.4% 9.4% 12.6%
fully diluted EPS 6.008 6.287 6.658 7.062 7.438 7.196 7.496
growth #DIV/0! 4.6% 5.9% 6.1% 5.3% -3.3% 4.2% 3.7%
Now the first thing you'll notice right off the bat is that
Cisco has a history of bringing in around 18-19% FCF on
their revenues. That's what we should be using for long
term sustainable levels of FCF. However, to be conservative
I'll use the average of the last 7.5 years, which was 12.6%
for my forecast. The other assumptions I'll use are as
follows: sales growth from $22B in FY01 grows -13%, 15%,
20, 25%, 20%, 15%, 10%, for FY02-FY09, and 5% thereafter
through FY 2030. In addition, I'll grow o/s shares by 3.7%
which is also the 7.5 year average growth (nevermind that
they've started to recognize the advantages of buying back
shares; so I'm being conservative here). Lastly, I use a
10% discount rate, because that's the avg annual return on
the S&P500 over it's history and that's what I can expect
if I invested my money elsewhere (opportunity cost of
capital). Lastly, I get the PV of each years FCF, add them
all up, divide that figure by the 2030 ending o/s share
figure (20.851 Billion), for a total of $12.48 per share.
Then I add in the current book value of the company, $3.75,
which is a good proxy for market value, in that most of
that book is cash and the market value of PP&E over book
may be offset by factoring of A/R, so again, I'm being
conservative by using book instead of current market value
of the company's assets.
That gives me a fair market value per share of Cisco's at
$16.23. I bet you didn't anticipate that, John!
Now if I tweak the figures to be less conservative and say
that historically, Cisco has been pretty consistent in
bringing in around 19% FCF on sales, then that bumps up my
fair value estimate to $22.49.
Furthermore, if I assume that Cisco will curtail the
dilution of their shares through buybacks and less stock
purchases and option grants, so that dilution only grows at
a 3% rate per anum, then that bumps up my fair value to
$26.79.
I could take it further to say sales will grow faster or
say that the company's assets are worth more than book
currently, etc. However, I think you all get the jist that
not only is Cisco fairly value right now in my most
pessimistic analysis, it could also be UNDERVALUED right
now, if I have been too conservative in any of my estimates.
So my conclusion is that Uncle Frank made a damn good
purchase of those shares under $15. His downside is
limited and his upside looks pretty darn good. |
