Hi Jacob,
Been reviewing the financials as reported in the 8-K.
Firstly, free cash flow remains strong, and impressive on the surface. On a classical basis, (earnings + depreciation - capex) for the 9 months ending April, it comes in at about 3.1 B$, not including non-cash capex which still appears to be significant.
How significant? Cisco depreciated about 1.1 B$ worth of goodwill and purchased intangible assets in the last 9 months, yet the total outstanding increased to 4,364 M$ from 4,362 M$. It's pretty clear that non-cash purchases of kibble are providing a boost of 50% or so to free cash flow. This is still a major strategy of the company and a sleight of hand that many people do not yet fully appreciate.
However it is not easily hidden. During the same period the company also spent 4.5 B$ buying back stock. Shares outstanding decreased by 244 M shares for an effective cost to the company of $18.44 per share. The rate of dilution represents a $3 premium, or about 1/5, putting a dollar cost to dilution of 1/5 x 4.5 = 0.9 B$ in the last 9 months. A bit more than a third of earnings in the same period.
Another metric to watch is shareholder equity, which has dropped from 28.7 B$ to 27.6 B$, a decline of 1.1 B$ on an absolute basis. Shareholder equity per share of $3.91 is $0.01/sh lower than the $3.92 from 9 months ago.
So despite impressive free cash flow capability of the core business approaching 1B/quarter, it's still being fueled by equity financing to a large degree and the company is still spinning shareholder wealth in reverse. This does not include the full impact of wealth transfer from shareholders to insiders as a consequence of stock options, which is no longer as dominant in the business model equation as it once was.
Gross margins are impressive. Very impressive and I had not anticipated that they would remain so strong.
I remain concerned about the price on a valuation basis, however I also sense a general upward bias to market sentiment and expect to see the general upwards drift continue for some time. As bad as things are, I suspect we are in a capital-trap where excess wages continue to flow into the market, seeking the best of a host of bad deals. And there are many worse deals out there (from a shareholder perspective).
John |
