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Technology Stocks : CSCO - where's the bottom?!?!? Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: bambs who wrote (99)	11/23/2000 1:54:51 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 253

bambs - they'd better keep CSCO stock afloat at current lofty prices, or risk a terrible four pronged hit to the machine. First, as options go underwater, that's a direct hit to cash infusion based on employee exercise. Looking at retained earnings distribution in 10K, and allocating "Other Comprehensive Income" (investments) proportionately, about 2/3 of their 26 B$ is the cuumulative effect of stock options!!! Second, as stock price changes, tax benefit of option exercise takes a hit. Estimating 180 M exercised per year and 25% tax break on difference between strike and market prices means tax benefit changes by about $0.06/share per $10 of market price movement. Third, as stock prices fluctuate, the cuffing effect on mercenary employees changes significantly. Weighted average grant price in FY 2000 was $52.10, easily more than half (by monetary value) of the 295 million options granted and assumed in FY 2000 are under water right now. Options granted in FY 99 are in the money now, but "worth" half as much to employees today as they were six months ago. Fourth and finally, the rate of appreciation of shares directly affects the pricing decision for a target company when shares are exchanged - particularly for fast growing startups. Since cash flow, operating margin, employee loyalty and aquisitions are the four fundamental pillars on which CSCO sustains growth... look out below if it starts to unwind. Just as it's virtuous on the upside, it's viscious to the downside. If CSCO sustains your price of $25, then just the impact of tax-credit loss would be significant. To quantify, if exercise rate remains constant, comparative tax costs affect cash flow per share negatively by $0.15/share. If exercise rate drops by 50% as employees "ride it out", comparative tax difference is 50% of current credits (2.4 B$/2 = 1.2 B$, or about $0.17/share) plus reduced benefit on the other 50 % (about $0.07/share) for total $0.24 / share. Such a cash flow impact just digs the economic hole deeper and undermines increased valuation going forwards. Cash flow from exercise plays out over 10 years, so unlikely to be a big hit early on. Impact on employee loyalty is hard to quantify, but if the bleeding starts it can be expensive to stop. Impact on aquisitions is to increase dilution from current hefty actual rate of 8%/year. My view we'll see tremendous effort to keep this one afloat. Too many vested interests to let it tank. Also, money inflows to the markets are about 5 B$/week. CSCO turns over about 2.5 B$ per day assuming average volume of 50M shares. So there's easily a lot of changing of hands going on that doesn't resemble real money flows from an extrinsic perspective. Lots of froth in which to manage the price. So, I don't look for a sudden tanking. I've been modelling a slow, gradual downwards grind as the most effective way to correct price to value. I measure "effective" in monetary terms for the large players. So unlikely to tank unless someone very big gets too greedy and overplays a high velocity exit. FWIW I make it currently varying about 15% from a mean, which is itself declining at about 4% per month, currently around $52, give or take some change. If your target is correct, and current trend is future indicative, we're in for a long, slow, agonizing grind. I'd rather that than the shock of a massive immediate correction and the collateral damage from aftershocks. But now is time for thanksgiving. Give thanks for the bull we've had, and pray the bear is short lived. John.