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

To: RetiredNow who wrote (53236)	5/21/2001 9:35:56 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 77397

mindmeld: This is great analysis. The entire thing hinges on what the future fair PE is for a company growing at let's say 30% per year. Right? Should it be 50? 40? 30? 20? I strongly suggest that your deterioration rate from bubble values to normal values is much too slow and that you should see a 5 year return to "normal" levels. Remember that CSCO had a PE in the mid 20's just prior to the bubble if I recall (I will have to go back and check, but some old-timers may have the data). If you plug in something like 30 for a PE then by 2005 you have a stock price of $31, which is a return of about 8% per year from here. If you plug in something like 20 for a PE, then by 2005 you have a stock price of 21, which is a return of about 0% per year from here. The point that shouldn't be lost however is the rate of penetration of new markets and/or deterioration in old markets. I'll ruminate more on this later. John.

To: RetiredNow who wrote (53236)	5/21/2001 9:45:52 AM
From: GVTucker	Read Replies (2) \| Respond to of 77397

mindmeld, I'm glad that John responded to that post, otherwise I wouldn't have run across it. In the post you show a year end price for Cisco in 2002 of $23 and change. Didn't you tell me that a year from now you expected CSCO to be $30? What I'm implying here is that almost all of the growth you're expecting over the coming 5 years is later on. And that is dependent on that growth rate continuing to compound. The key to me here is that you can't miss a step. Otherwise that big compounding in year 5 disappears.

To: RetiredNow who wrote (53236)	5/21/2001 9:18:58 PM
From: Jacob Snyder	Respond to of 77397

Thanks. That's the most useful post I've read on this thread (including my own) this year. Some comments: 1. I'll agree with other comments, that one problem (the main variable that could change your expected stock price) is the PE. Taking the current PE, and extrapolating a small decrease yearly, is not reasonable, IMO. In spite of Chamber's near-term pessimism, he continues to reiterate the 30-50% LT EPS growth rate. If that happens, and if those earnings are seen to be reliable, then maybe CSCO is worth a PE of 50 and above. But, earnings have proven to be unreliable, so I don't think CSCO gets any PE premium over its growth rate. It will take 5 years or so for investors to forget the debacle of 2001, and accord the stock the premium given to companies whose earnings prospects are reliable. 2. You project EPS growth rates (2002-2005) of 22%, 24%, 28%, 32%. Even leaving out the 2001 EPS "growth" rate, that means the stock should be accorded a PE in the 22-32 range (if fair value PE = EPS growth rate). 30-50% EPS growth rate, IMO, is unattainable, as your numbers show. 3. The only way CSCO grows EPS at much greater than 30% (and justifies a PE much over 30) is if they gain a lot of market share in big markets. Otherwise, I see the PE going to 30 and staying there. There is actually some hope, that Cisco can grab market share in sizable markets, like DWDM and Sonet/SDH. They've done it before, and they could do it again. The key word there is "could". 4. Market share: Here again, you make an assumption (no change) that is not reasonable. I'm certain Cisco's market share will change a lot, in various markets. Based on their past track record (last 10 years, not last 6 months), I'm willing to bet they gain market share. The competition is certainly in trouble (worse debt, more loans to write off). But Cisco is also in trouble, since they aren't buying their new product pipeline any more. That was a crucial part of their business plan. Will they start acquiring again? Will they be able to develop products inhouse? Will they do to JNPR what they did to 3COM? The answer to these questions decides whether CSCO is at a PE of 20 or 50. 5. So, your numbers convince me that there is no margin of safety in the stock, at a PE over 30. Any PE over that, is dependant on performance that is not at all certain. We could return to growth rates of 40% or more (the markets are big enough, and Cisco's share of them could increase). But it's not at all certain this will happen. IMO, a growth rate of 20-30% is a lot more certain, and a PE of 20-30 gives a margin of safety for an investor, for a buy-in price. If I buy at a PE of 30 and below, I'm willing to bet that valuation is sustainable (and might even increase some), and I'll get a good increase in the stock price from the increase in EPS. Above a PE of 30, it's a much less certain bet. Specifically, I don't think a PE of 50 is sustainable, even given optimistic assumptions.