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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (43497)	6/14/2001 10:55:37 PM
From: Stock Farmer	Read Replies (2) \| Respond to of 54805

Ok, I understand now your reference to Black Scholes. IMHO this business of comparing companies based on hypothetical employee wages not paid is silly. Kind of like saying what would LU be like if they didn't have all that debt. The costs do show up. Better to account for the costs where they arise and the impact on what you are buying (in my case, cash flow). I mentioned both impacts to cash flow for completeness, not merely in reference to Free Cash Flow valuation. All cash that flows is valuable, some to more or lesser degree. Sources and sinks are vitally important to identify. As to FCF, yes we are on the same wavelength. But I don't get the same number. I'll be very complete again. From CSCO FY 2000 10K I get + 6.141 B$ Cash Flow from Operations - 2.495 Tax benefit from Employee Stock Options - 1.086 Acquisition of Property and Equipment - 0.444 Purchase of Technology Licenses + 0.026 Acquisition of Businesses Net of Cash ======= + 2.140 Free Cash Flow Divide by weighted average shares (during the period) of 7.438 Billion gives us $0.29 per share FCF. I think our differences are (a) a typo: you didn't mean to say "2.560 billion in acquisition of property and equipment", you meant to say "1.086", and (b) I include acquisition of business and intellectual property as these are alternative aspects of "property and equipment" for a tech co like Cisco. I then recognize a "banking" cash contribution of - 4.377 Cash flow from Investing + 1.086 Acquisition of Property and Equipment + 0.444 Purchase of Technology Licenses - 0.026 Acquisition of Businesses Net of Cash ======= - 2.871 = $(0.39) / sh diluted This is tempered with a change in value of "investment" assets (from balance sheet), namely 6.682 B$ = $0.92/sh diluted, for a net gain of $0.53/sh in cash+investment asset value. This is "lower quality" asset than pure OCF. And a "selling slices" cash contribution of + 1.557 Cash flow from Financing + 2.495 Tax benefit from Employee Stock Options ======= + 4.059 = $0.54 / sh One can see from this that incremental shareholders paid $0.54/share (on behalf of all shareholders) to purchase a business that returns $0.29/share from operations and $0.53/share from investment. This is quite a different picture than the $0.44/share "cash flow" that arises from an unsophisticated analysis. Finally one can make one other clever calculation. Assuming that the stock options never go under water, the unexercised stock options represent a pending cash inflow from employees to the company. Kind of like a bond. With 971 M stock options outstanding at an average exercise price of $24.19, if the stock goes above the highest strike of $72.56 in the next 3-9 years then the company can expect to receive another $23.5 B$ in cash from the employee contribution. If the 2:1 ratio between employee contribution and tax credit contribution holds, that adds another 50 B$ in cash for a total of $10/share of "hypothetical" cash... if only the stock stays up there. Given the book value of the company hovering at $3/share, you can see that the actual stock price has a not-so-insignificant effect on the underlying asset value that a share represents. This is what makes modelling a high-option company like Cisco and the rest of the tech genre so difficult. Kind of like designing a nonlinear optical amplifier from a solid state material with intrinsic positive feedback. Not easy. John.