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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Vendit™ who wrote (27668)	8/16/1999 7:48:00 PM
From: Brian Malloy	Read Replies (4) \| Respond to of 77400

CSCO should be standing tall tomorrow. The fall out from the WCOM/LU problems should be interesting. If LU buys up the technology but can not integrate it or keep the key people that know the software/hardware then the future will not be as bright.

To: Vendit™ who wrote (27668)	8/17/1999 12:06:00 PM
From: John Malloy	Read Replies (1) \| Respond to of 77400

Cisco has grown at a remarkable 51 %/yr. for the past nine years. Because of this rapid growth, investors are willing to pay a rich price/book ratio of 18 -- about eight times the ratio typical of a mature firm. How do you tell whether Cisco costs too much? How can you tell what Cisco is really worth? You cannot assume that growth that fast will last forever. Growth has been slowing, from 60 %/yr. in the early 1990's to 44 %/yr. in 1999. Growth will continue to slow as Cisco matures. Nor can you assume that the price/book ratio will stay at 18 forever. Investors will no longer pay such a rich price as Cisco's growth slows. Putting a dollars-and-cents value on a stock like Cisco requires forecasting how Cisco's growth rate will slow and how investors will lower the price/book ratio they are willing to pay. Cisco's value also depends on the minimum rate of return an investor will accept, and on how long an investor intends to hold the stock. I am the author of two books on quantitative analysis of securities. The most recent book features a way specifically tailored to finding what growth stocks like Cisco are worth. You can forecast by drawing free-hand forecast curves on a sheet of graph paper. The curves can twist and turn any way you like to describe how you think Cisco's growth rate will slow and the price/book ratio will fall. Free-hand forecast curves provide the ultimate flexibility in forecasting future performance. I can translate those free-hand forecasts into a dollars-and-cents value for the stock. I used the method to find how an investor in the 28% federal and 6% state tax brackets would value Cisco if he insisted on a minimum after-tax return of 12% and planned to hold Cisco for five years. My free-hand forecast has growth slowing gradually from 45 %/yr now to 38 %/yr. in two years, then to 28 %/yr. in five years. Similarly, the price/book ratio drops gradually from the current 17.8 to 14 in two years and to 7 in five years. Once you forecast Cisco's future growth rate and price/book ratio, you implicitly forecast future stock prices. If these forecasts hold, Cisco's price will grow from $63 today to $117 in two years, and to $148 in five years. This investor could afford to pay $69.50 for Cisco and still meet his 12% minimum return target. He would earn an after-tax return of 14 %. If he insisted on a 15% after-tax return, he could only afford to pay $58. And if he were willing to settle for a 10% return, he could pay $78. If you accept these forecasts and an after-tax return of14 % or less, Cisco is worth more than its curent $63 market price. You can find details on the valuation method at analyticalbooks.com, and an example showing how to find what Microsoft is worth. John Malloy