True, current quarter had great margins. Quarter before the margins weren't so good and before that they were terrible. Extrapolating linearly we should expect margins in excess of 100% sooner or later.
If margins stabilize at any level we will have a good solid business. The problem is establishing the point at which margins will stabilize and the revenue at which these margins will be earned, and what will be done with the proceeds and how effective the end result will be in improving shareholder wealth.
What we have here with Cisco is a company entering its mature phase as a cyclical industry. No longer a pure growth story, and not yet purely cyclical.
The trap here is that neither of the two extreme valuation models apply. So on the one hand we have the optimists chanting growth and claiming that it should be priced at twice as high and the pessimists pointing at cyclicals and calling for half. Quite natural.
Personally I don't give a hoot about operating cash flow or margins this quarter or any other such short term myopic measure-de-jour. There's even money to be made in shrinking cyclicals if one can get 'em at the right price.
I care about the price of profits over the long term. Economic profits, not accounting profits. When the company prints a billion dollars worth of shares, then uses them to acquire a billion dollars worth of future earnings, if I'm a shareholder I'm not one penny richer. However, if accountants mark this cost of obtaining future earnings written down as "in process R&D" over three years and the earnings indeed do show up, it will appear as 333 million in operating cash flow over each of three years and incredible margins. Presto. Or should I say "Cisco".
Because this is how Cisco has generated most of its so called Operating Cash Flow. Or at least it used to do this. Go look at my valuation post to mindmeld where I jabbed him with a missing few billions.
They've still got about a year or so of remnants to surf on - all that M&A activity in 2000 is still bearing fruit. The issue here is what are we going to do about all the growth that wasn't purchased in 2001 and 2002 when 2003 and 2004 rolls around and the products launched in 2000 accrete the label "legacy".
And looking forward, most employee options have gotta be underwater, so as long as Cisco keeps its current share repurchase program in place (pretty easy with an $8.50 share price, $20 billion cash and strong operating cash flow) you're likely to see the reverse of dilution (Is there one word for the opposite of dilution? share concentration?) in the upcoming year.
Dunno.
As far as keeping its share repurchase program in effect, I'm not sure. Cisco bought back a bunch of shares last year at prices above $15. A billion here, a billion there and pretty soon all of Cisco's tremendous "operating margin" is all used up.
Looking forward, about 300 Million someodd employee options are above water or within breath-holding distance of the water line at just over $12. These were all above water a few months ago. So yes, most of the Billion or so outstanding options are pretty much goners. But this other significant fraction of a billion are still treading water or doing the survival float. You know, there are companies in the Fortune 500 with less market cap than Cisco's above water options represent. They are also authorized to issue a few hundred million every year in new options. If your thesis about Cisco being such a deal is true, hardly likely these will end up underwater, eh?
And as far as use of cash is concerned, your science is a bit wooly and it's a good thing (for Cisco shareholders, relatively speaking) Cisco management are a bit more sophisticated in their analysis than you seem to be. Personally, if Cisco can use its cash to buy companies with a price/sales ratio less than 3, ciscoesque margins and growth potential greater than Cisco... well, then it's a much better use of cash for it to buy these companies than to issue shares. Or to buy back its own shares. If not then the opposite is true. But it isn't a blanket one way "Gee, it would be good if the company bought back shares...". Mindmeld summarized nicely in a few other posts. Both of us are out of Cisco even at these prices.
John |
