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

To: Stock Farmer who wrote (58491)	3/13/2002 4:57:58 PM
From: RetiredNow	Respond to of 77400

Holy Moly, John! You caught me on a major mistake in my calculations. You stated in your post that a company should be valued at PV of Discounted FCF plus the market value of all its current assets minus its liabilities. This whole time I've been only calculating the value of Cisco's future cash flows, not the present day value of all it's assets minus liabilities. That will promise to add about $3.75 per share to my estimated stock price! As to you discussion below, what you are Hueyone are saying is logical, although I think a very plausible argument can be made that over the long term, net working capital fluctuations are immaterial. However, I still have some points of contention with your analysis below: 1H 02 1Q 02 2Q 02 Net Income 392 -268 660 Depreciation & Amortization 935 459 476 Amortization of In-process R&D 25 25 0 ----- ----- ----- Subtotal (cash from ongoing operations) 1,352 216 1,136 Provisions (doubtful accounts, inventory) 57 -3 60 Tax adjustments -396 -497 101 Investment Losses & Provision for losses 1,014 971 43 Changes to Working Capital 1,364 697 667 ----- ----- ----- Subtotal (cash from asset fluctuation) 2,039 1,168 871 ===== ===== ===== Total 3,391 1,384 2,007 Purchase Property, Plant and Equipment -482 -292 -190 ===== ===== ===== Free Cash Flow 870 -76 946 Free Cash Flow / Revenues 9.4% -1.7% 19.6% Let's let the whole changes in working capital argument slide for now, because by the same token that I think it is immaterial over the long haul, for the most part, I've factored it out anyway through adding back to net income the changes in operating assets and liabilities. The only adjustment I'd have to make is for changes to cash and short term investments and that would bring my FCF estimate in line with yours. However, you are also including in your net income the investment losses, which are most certainly a very recent and unique phenomenon in Cisco's history. To be fair, those investment losses should be added back to get your true cash flows from operations. Cisco has their cash and investments in the most conservative investment vehicles currently and the last couple of years were a fluke and not likely to happen very often going forward. Either way, you are artificially depressing the Free Cash Flows number by not adding the losses back in. That alone would add back a billion to FCF for the first half of the fiscal year. Now coming back to the working capital argument, I've calculated changes in net working capital from July 1995 to July 2001 as being a total of $4.081 billion. The increase is completely explained by the increasing size of the company. You would expect working capital needs to increase as the size of the company increased. Be that as it may, that would be excluding $4.081 billion from our FCF during this 6 years ending fy01. So you can use that to plug in. Which brings me to tax benefits from stock options exercise. I think we should include it in FCF. Because in our discounted cash flows we are showing the o/s share number growing as a result of the dilution from stock options, so we should also show the benefit. Otherwise, if you say the benefit is not sustainable, what makes you think the company will continue to dilute the shares if they are not receiving a tax benefit? So if you exclude one, you need to exclude the other.