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

To: Stock Farmer who wrote (44666)	12/16/2000 2:59:37 PM
From: John Malloy	Read Replies (1) \| Respond to of 77400

John, Congratulations on suggesting a novel use of this thread – estimating what Cisco is worth rather than trading barbs! Here is a straightforward approach. I am concerned only with the cash that flows into my pocket as a result of buying Cisco. Since Cisco does not pay a dividend, the only cash I will receive is what I get when I sell – the stock price at that time less a capital gains tax and broker’s commission. Cisco is worth the present value of that future cash flow discounted at whatever after-tax rate of return I insist on. The easiest way to model Cisco’s future stock price is to multiply equity/share by the price/book ratio. Equity/share has been growing 49 %/yr. since 1996. Growth cannot stay that high forever. Suppose you allow for growth to start at today’s 49 %/yr. and gradually approach a long-run value of 10 %/yr. with a five-year half life. Today’s price/book ratio is 12.9. The P/B ratio will drop as growth slows. Suppose you allow for the P/B ratio to start at today’s 12.9 and gradually approach a long-run value of 3 with a three-year half life. Start with today’s equity/share of $3.88 (the last reported value plus 1.5 months growth at 49 %/yr.), and let the growth rate and P/B ratio fall as outlined above. That will bring Cisco’s stock price to $67 in one year, $86 in two years, and $160 in five years. If I insist on a 15% after-tax return, Cisco will be worth $54 if I hold it one year, $58 if I hold it two years, and $63 if I hold it five years. If I lower my minimum acceptable return to 10%, Cisco is worth $58, $65, and $84 at those same holding periods. If I raise my minimum return to 20%, Cisco is worth $51, $51, and $48 at those same holding periods. John Malloy