You Can Only Buy Pro Forma Food with Pro Forma Earnings
Following are two versions of how the news was reported. It is "interesting" to note how MS-NBC presented the results in their news alert as compared to DJ/WSJ.
I guess if someone wants to buy CSCO at a premium price tomorrow, someone has to take their money. I always thought they didn't want your stock, they wanted your money.
I don't imagine that most shareholders have realized that you can only buy Pro Forma Food with Pro Forma Earnings.
After the two news stories is a copy of a post from another site which shows how ridiculous CSCO's price is.
Don't get me wrong. It is a great company, at the right place, at the right time. The price per share is just much too high. But they say don't fight the market (feed it).
This is not a recommendation that anyone short CSCO. While it might be profitable it may take some time and staying power. MM/PPT wants CSCO.
MSNBC STAFF AND WIRE REPORTS
Cisco Earnings Surge 58 Percent
Networking giant faces SEC probe over ArrowPoint deal
May 9 - Cisco Systems Inc. Tuesday reported third-quarter operating profits that rose 58 percent while sales surged 55 percent as the biggest maker of data networking equipment sold more Internet gear to businesses, telephone and cable companies and Internet service providers. Separately, the company said the Securities and Exchange Commission is investigating possible insider trading in the stock of ArrowPoint Communications Inc. ahead its announced purchase by Cisco.
An INTERACTIVE JOURNAL News Roundup
Cisco Results Edge Past Estimates
As Gear Maker's Revenue Soars
SAN JOSE, Calif. -- Cisco Systems Inc. posted a quarterly profit that edged past Wall Street estimates amid a strong gain in revenue.
The networking-equipment giant said fiscal third-quarter net income rose 4.1% to $662 million, or nine cents a diluted share, from $636 million, or nine cents a share, a year earlier. Cisco's quarter ended April 29.
On a pro-forma basis -- which excludes the effects of acquisition charges, payroll tax on stock-option exercises, and gains realized on certain minority investments -- profit rose to $1.03 billion, or 14 cents a share, from $649 million, or nine cents a share, a year earlier on the same basis.
Revenue rose 55% to $4.92 billion from $3.17 billion a year earlier.
The pro-forma results were one cent a share ahead of the mean estimate of analysts surveyed by First Call/Thomson Financial. The results were in line with the so-called whisper estimate.
Cisco's revenue was ahead of many estimates. Martin Pykkonen, analyst with CIBC World Markets, was expecting revenue of around $4.68 billion.
The results could reassure technology investors, who will also look to results from Applied Materials Corp. and Dell Computer Corp. later in the week to check the pulse of the sector. Cisco results could also boost its stock, which took a hit Monday following an article in Barron's that questioned its high market valuation.
In Tuesday trading on the Nasdaq Stock Market, shares of Cisco closed at $62.75, unchanged, after dropping $5 Monday.
During the quarter, Cisco completed the acquisitions of Aironet Wireless Communications and Pirelli Optical Systems for a combined purchase price, including assumed liabilities, of about $2.85 billion. It took one-time charges of $488 million, or about six cents a share on an after-tax basis, as write-offs of purchased in-process research and development. Cisco also completed the acquisitions of Altiga Networks, Compatible Systems and Growth Networks Inc., which were accounted for as poolings of interests.
by Howard Hill
08 April 2000 14:58 UTC
You've got it, Dhruv. The long duration (holding period to re-pricing)
is either a zero coupon bond (if you plan to sell the stock when you
need the cash), or it's a Single Premium Deferred Annuity (if you plan
to live off income from the stock at some point in the future). Either
way, they are extremely sensitive to interest rates, especially the
riskless T-bill or CD.
The other piece of the pricing is a call option. While I don't believe
this should be part of the big cap pricing because of inherent limits to
market size, it can apply to smaller companies that may have some
breakthrough that allows them to grow into big companies. Currently,
some biotechs, Eric's new energy startups, and a handful of other small
cap companies have this potential.
If I look at one of the bubble darlings, Cisco, I see a prime example of
the disconnect between real limits to growth and current market
pricing. I saw CSCO's CEO in a profile last night that portrayed him as
the #1 CEO in America. I have no doubt that the company makes good
products (I use their routers), that the employees are for the most part
happy, and that it is actively staying at the leading edge of
communication interconnect technology through acquisition, etc.
Nonetheless, when the CEO states a ten-year goal of tripling sales, I
have to wonder about the pricing that gives it a trailing P/E of 170, a
forward P/E of 145 and a Price/Sales around 35x. With current sales per
share of $1.89, how can this be a $73 stock? If we assume that the
CEO's sales goals are met, and further assume that every dollar of
increased sales falls to the bottom line at the current gross margin
level of 65% (net pretax margin is 28%), then CSCO will be making less
than $3 per share in ten years if share dilution stops today. Even with
all these generous assumptions which stretch credulity (especially the
lack of dilution), the company will still have an earnings yield below
T-bills or savings accounts ten years from now, if the price just stays
where it is. In the mean time, today's 10-year Treasury Note will grow
by 77% over that period with coupon reinvestment at the current yield.
Maybe the investing public knows something the CEO doesn't. However, I
just can't see a society in the future which spends a quarter or half of
its total gross income on communications equipment. In sum, I think
anybody who bought CSCO over the past few months will be very lucky to
break even over the next 20 years or so, and that they are almost
certain to underperform the investors who put their money in Money
Markets or T-bills. |
