Thank you for that excellent response. Opinions based on logic, facts, and numbers have been scarce on this thread lately.
I agree, that CSCO is now in "buy-range". That is, I have a near-certainty that buying the stock at this (or any lower price) and holding for at least 3 years, will be a good investment.
re: "Cisco is the major player in a high-growth market". Agree, completely. For all the trouble CSCO is having in this downturn, when all their customers suddenly found access to capital throttled, their major competitors (LU, NT, etc.) have been doing worse. And Juniper is something that has happened to Cisco repeatedly in the past. As a Gorilla, Cisco has eventually won those turf wars, or at least pushed the competitor into a niche position. They have done this many times in the past, and so, based on their track record, I expect them to do this again. I could be wrong, but the odds are in my favor. Cisco is, and shall remain, the best in the world at what they do. And their market will recover. Yes, a lot of the dotcoms and telco startups will go under, but information transfer is a growth business (maybe THE growth business) for the foreseeable future, and Cisco sits at the center of that business.
I think your analysis of equity/share and P/B, in trying to tell whether CSCO is Value at these prices, is as good as any. Unfortunately, that isn't saying much. In the Information Age, I don't think Book Value is a very useful metric. When a company's assets are in land, buildings, etc, then Book is useful. But Cisco's value is in the creativity and intelligence of its employees, and Book Value doesn't measure that.
And, since Cisco has grown through acquisitions, and engaged in a lot of Creative Accounting, I really don't trust the Earnings numbers either. They show: trailing PE about 60 (and PE using forward 12M earnings, unfortunately, isn't going to be much different). LT consensus EPS growth is 30%. So, CSCO is now at a PEG of 2, about twice what it was when I last took a longterm holding in CSCO in early 1997. Using forward earnings in this calculation means using a number that is very uncertain, and still doesn't get the PEG anywhere near 1. To get to the valuation reached in 1997, the stock would have to be chopped in half, from today's price.
Sales, maybe, would be the most useful metric. At least the numbers are meaningful (unlike Book) and reliable (unlike earnings). I'm having trouble accessing the site where I usually get historical P/S data, so I can't say where the P/S is today relative to their range. Market cap of 190B divided by sales of 18.7B = P/S of 10.1 The market's P/S is 2. Does CSCO deserve a valuation (based on P/S) 5 times that of the market?
I also don't think that simply because the stock has gone from 82 to 25 makes it a good buy. Those Bubble Valuations, I think, are an outlying data point, a twice-a-century event.
But the main reason I will not be buying CSCO LEAPs on Monday, is because I think this downturn is going to be U-shaped, not V-shaped. It's going to take a while for sentiment and momentum to turn. That is, I think we are going to bounce along the bottom for at least several months, possibly the rest of 2001 (if we get a recession) before any sustainable upturn happens. Forward earnings estimates, IMO, need to come down further. The credit crunch isn't over yet, the full story and resolution of all the bad debts is just beginning. Wherever the bottom is, we'll get several chances to buy there, is my guess. |
