Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Brian Malloy who wrote (28317)	9/15/1999 11:46:00 PM
From: RetiredNow	Read Replies (1) \| Respond to of 77397

Nice article, Brian. This is exactly what I was talking about with Mizzou. Nowadays nobody cares about PEs. The thing to focus on is a cash flows based method of valuation. And by the way, now Cisco has about $10 billion in cash, not $1.9 billion like the article said. So any model that uses some cash flows based method to value Cisco will prove that Cisco has plenty of stock price growth left ahead of us. There estimate of $300 in 5 years is a bit rich for me. But I am willing to bet that Cisco's stock price will reach at least $210 within 5 years. So my advice is to look at the net cash inflow per quarter. That is the best sign of growth. Cash doesn't lie. Earnings etc can be played with.

To: Brian Malloy who wrote (28317)	9/16/1999 12:24:00 AM
From: Mehitabel	Respond to of 77397

Brian-- hi. good article. Thanks for posting it. I am currently reading the book. At the risk of having people hoot at me since the book has been titled and commented on in with a rather snide, slurry way by a number of commentators, I'm on p. 87 and it is all rational so far. The point of the book is merely that everyone using the old measures of value is mystified at why the market could go up so much so rapidly. BUT if you just change your assumption, and use the discounted cash flow method of value, then it becomes clear that the market is in the middle of a one-time correction upward toward the true value, which is two, maybe three or more times current values. Hey! Make hay while the sun shines in my motto! regards, and thanks again for the article

To: Brian Malloy who wrote (28317)	9/16/1999 5:34:00 AM
From: elmatador	Respond to of 77397

And don't forget 28111 posting Why CSCO is not overvalued

To: Brian Malloy who wrote (28317)	9/16/1999 7:27:00 AM
From: Zoltan!	Read Replies (2) \| Respond to of 77397

Thanks. Glassman is one of the best. Funny how he should use Cisco to illustrate an undervalued stock. He also writes two columns for the WP and has a PBS show, TechnoPolitics. Here's a link to some of his earlier articles that I posted Message 11103528

To: Brian Malloy who wrote (28317)	9/18/1999 11:38:00 AM
From: John Malloy	Read Replies (1) \| Respond to of 77397

Be wary of the Glassman/Hassett paper reported in post #28317. Written with a "gee whiz" flavor, the paper claims that Cisco is way undervalued. Glassman/Hassett calculate that Cisco is worth anywhere from $122 to $399. They also calculate that the Dow-Jones average ought to be 36,000! Glassman/Hassett use the "standard formula" to find Cisco's value. That formula says a stock is worth the current dividend divided by the difference between the discount rate and the dividend growth rate. When a stock like Cisco pays no dividend dividends are zero, and the formula says the stock is worthless. Glassman/Hassett get around this problem by assuming that Cisco grows at its current rate for five years without dividends. Growth then suddenly collapses to the GDP growth rate, less 0.5 %/yr. From then on Cisco pays 70% of its earnings out as dividends forever. That valuation formula is exceedingly sensitive to the difference between the discount rate and the dividend growth rate. You can make Cisco's value almost anything you want by varying the discount rate. Glassman/Hassett do not tell us the discount rate they used. Glassman/Hassett's assumption that the growth rate stays constant for five years also inflates Cisco's value. Cisco's growth has been steadily slowing for the past ten years. Why would growth suddenly stop slowing and stay constant for five years? And why would growth then suddenly collapse after five years? Glassman/Hassett claim that Cisco's earnings grew an average of 115 %/yr. over the ten years from 1989 to 1998, and 59 %/yr. from 1994 thru 1998. They present one calculation where the growth rate stays constant at 59 %/yr.for five years; then collapses. That calculation results in the $399 value for Cisco. They also do a "conservative" calculation where the growth stays constant at Value Line's estimate of 25.5 %/yr.for five years; and then collapses. That calculation results in the $122 value for Cisco. But if you plot Cisco's earnings against time on semi-log graph paper, you find three periods of constant growth rate (three straight-line segments). Growth was constant at 117 %/yr. only from 1989 through 1991. Growth then slowed to 60 %/yr. from 1991 through 1996, and slowed further to only 19.5 %/yr. from 1996 through 1998. The "conservative" calculation based on 25.5 %/yr. growth is still optimistic. Cisco's growth will certainly not stop slowing and stay constant for five years, then suddenly collapse. Growth is much more likely to continue slowing gradually, and eventually line out at something approaching the GDP growth rate. A realistic value for Cisco must be based on that kind of growth pattern. I have published a valuation model which allows that kind of pattern. My Unlimited Flexibility Model allows you to forecast by drawing a smooth curve on a sheet of graph paper. You can bend and twist the curve any way you like to describe how you think growth will slow. See analyticalbooks.com for details. When Cisco was selling for $64 a few weeks ago I calculated that Cisco was worth $71 using my model. Do you think investors are so dumb they would undervalue Cisco by 48 to 84%, as Glassman/Hassett claims? Or would you accept my calculation, which says that investors by and large know what they are doing, and are undervaluing Cisco by only 10%? John Malloy