Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Stock Farmer who wrote (62761)	1/24/2003 1:55:40 PM
From: RetiredNow	Read Replies (1) \| Respond to of 77400

All very factual and complete, John. However, I must point out that enterprise value is determined from what wealth we expect to be created over it's future years. Thus the discounted free cash flows model. From that perspective, Cisco is still worth a healthy $9 per share for anyone willing to invest (and judging from the way the market is headed, we might get there again soon). Anyway, the sooner options expense is accounted for in the income statement, the better off all the shareholders will be. Hopefully, with the elimination of dividend taxes and the pressure continuing to mount for stock options expense, we'll one day see companies with cleaner, easier to read financials, as well as a management that is more aligned with increasing shareholder wealth, instead of employee wealth.

To: Stock Farmer who wrote (62761)	1/24/2003 3:27:10 PM
From: hueyone	Respond to of 77400

Let's actually do all of the math and lay it out for the thread, one more time. Hi John, I really appreciate you laying out all the math!! I know it takes a great deal of work, and not many posters are willing to share these kinds of efforts. But right now, I absolutely have to go to work (I do have a real job), so please give me a chance to take a look over this weekend. Best regards, Huey

To: Stock Farmer who wrote (62761)	1/25/2003 1:08:31 PM
From: hueyone	Read Replies (1) \| Respond to of 77400

Huey - Yes, you are closing in on the truth of the matter. And it is even more astonishing than you might believe. Hi John. Thank you for your considerable effort in putting those numbers together for your post. I have had a chance to briefly study your post, and yes, the truth about real wealth creation may indeed be even more astonishing than I thought, or on the other hand, I may be slightly confused. I was under the impression that when companies purchased other companies or capex with shares (as opposed to stock options) that companies were obligated to show an equivalent dollar value investment amount in the investment cash flow section of the cash flow statement. Of course I presumed that this same dollar amount would be added back into the cash flow statement in the finance section so that the bottom line cash flow number would balance out for actual cash flows. So if share based payments for capex or businesses are included in the investment section of the cash flow statement, I further presumed that these investment expenses were showing up in folks free cash flow calculations. Your post however, appears to indicate that not only are companies getting away with excluding stock option expense in their free cash flow calculations, but they are also getting away with ignoring purchase of capex or businesses with actual shares in their free cash flow calculations. If this indeed is the case, the fraud being perpetrated on investors by those touting free cash flow numbers that do not take into account either share based purchases or employee stock option compensation, is far greater than even I suspected. Am I missing something here? Mindmeld, John, do you have comments on the accounting for share based payments? I know that share based compensation payments to employees(unlike stock options) are required to be expensed and deducted from net income. Do not share based payments to acquire capex or other businesses show up as an expense in the investment section of the cash flow statement? Are not these share based investment expenses subsequently deducted from free cash flow? If not, free cash flow numbers being touted for tech companies are an even more misleading number than I thought. Best regards, Huey

To: Stock Farmer who wrote (62761)	1/27/2003 7:45:53 AM
From: rkral	Read Replies (1) \| Respond to of 77400

John, Great post. I appreciate the effort that goes into a presentation like that. I followed along fine until: >>"Take capital then, add more between now and then, have some depreciate... this has to add up to what we have today. In other words, the total should be 1,535 M$. But it isn't. Lo and behold, depreciable assets are 8,464 M$ (Property plant and equipment alone is 4,102 M$)!! Obviously, the company somehow spent 6,929 M$ that didn't show up on the cash flow statement. No mystery, it was purchased with non-cash. With shares. Remember all those acquisitions?"<< OK, I see how FCF was insufficient to cover the net increase in D&A assets, but to believe the difference was purchased with stock .. is an enormous leap for me. You are presenting a "value-flow model" where only FCF and stock funded the increase of D&A assets. I don't understand how that model can be accurate. In particular, two things bother me. First, as a business grows, it requires more working capital .. just like it needs more Property and Equipment. Over Cisco's last 7 fiscal years, the years you showcased, working capital increased $8.3 billion, from $0.66B (1.0-0.34) to $9.0B (17.4-8.4). To be consistent, shouldn't the model be allowing, even requiring, FCF funds to provide the working capital? Secondly, and while not the case for Cisco, Property and Equipment are often purchased with long-term debt. Why didn't this potential provider of cash deserve get an honorable mention, at least? TIA, Ron :-)

To: Stock Farmer who wrote (62761)	1/27/2003 4:54:35 PM
From: bofp	Read Replies (1) \| Respond to of 77400

John, Huey, Mindmeld, et al., While I have believed Cisco to be wildly overvalued for six years, thus missing both the ecstacy and the agony, I must stress that cash flow valuation MUST assess the value of current assets and future cash flows to a holder of a single share of stock in today's values. Yes, option grants dilute the current shareholder by adding a further claim on assets and cash flow and no, current accounting principles do NOT adequately provision for this effect on value. However, this does not mean that present period free cash flows should be decreased by a non-cash share issuance. In response to John's example of the amazing disappearing cash flows - there is a little non-purposeful misdirection going on here. When assets are paid for with shares rather than cash, the book value is transferred and the goodwill set by the per share price of the stock at the time of the transaction. To use these values to determine wealth creation years later, by subracting them from actual cash flow ignores the change in the value of the additional shares over time and the possibility that the book value of the assets may no longer be a fair representation fo the market value of the assets. Moreover, unless you're planning to liquidate the company, even the market value may be specious. Between 1996 and 2002, Cisco's cash and investments increased from $2B to over $20B (almost 2/3s from the paid in capital and tax shield of the option program, no other significant financing in flows). Total shares increased from split adjusted 5.7B at the start of 1996 to 7.5B at the end of 2002. To be fair, there are another few hundred million options that are unvested, so lets up the share count to 8B. So options and acquisitions account for between 2 and 2.5B shares, or 40% dilution. So the cost of the share increases to date is 40% of the $18B increase in cash, or $7.3B (plus 40% of claims to future cash flows, but we're just counting weath creation here). Nonetheless, the wealth creation to the existing shareholders during the period was more than $10B not $627m. If the wealth creation on a cash basis had only been $627m, with prospects for more of the same, Cisco wouldn't deserve to trade for a dollar a share. Now, think Cisco is almost double its true value, but I do think it's worth more than a dollar.