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: bofp who wrote (62787)	1/28/2003 11:32:58 AM
From: hueyone	Respond to of 77400

Hi Bobf: Here is an example where an easily seen problem arises in not adjusting reported free cash flow in some manner to reflect the stock option problem: Oracle, and I believe Dell, have made it a company policy over the years to repurchase shares to counteract dilution. It is my further belief that these repurchases have been on average, at much higher prices than the exercise price money coming in. Furthermore, when these companies repurchase shares, retained earnings is generally reduced by a cash amount equal to the repurchase amount. Thus the stock option program taken in its entirety is ultimately resulting in cash reductions to retained earnings that is not reflected in the reported earnings or reported free cash flow numbers. Both reported earnings and reported free cash flow numbers which do not take into account stock option expense, are very poor indicators of these companies abilities to grow and retain wealth from internal business operations for the benefit of outside shareholders. And both reported numbers, unadjusted for stock option expense, make extremely misleading cross industry, cross company comparisons, with companies who do not heavily employ stock options. JMO, Huey P.S In cases where companies do not repurchase shares, outside shareholders also pay for the stock options program, but the trail is not quite as easy to follow as it is in the case of share repurchases. There are no free lunches as "Technet" and "AEA" would try to tell us.

To: bofp who wrote (62787)	1/28/2003 12:37:33 PM
From: Stock Farmer	Read Replies (4) \| Respond to of 77400

LOL... Your teaser is simple. The men paid $270, of which 250 went to the hotel and 20 to the clerk. But not the same situation at all. Some shareholders increased their wealth. No doubt about it. Look at those 5.7 Billion shares that used to lay claim to 2 Billion in assets. Now there are 8 Billion shares and share equivalents laying claim to 28 Billions in equity, close to four bucks per share. Clearly the Cisco machine created considerable wealth for those first shareholders. HOWEVER, one must ask what happened to the wealth of those holding the other 2.5 Billion shares. Their wealth increase is computed as: Wealth_After minus Wealth_Before. And if you do the accounting carefully, it is negative. Ask yourself one simple question: where did that 28 Billion in cash come from? Particularly when the company has only generated 7 Billions in profits lifetime. And once you figure out where it came from, ask yourself how much did it start out being? The answer is simple. Those extra 2.5 Billion shares were issued in consideration for some other assets. Which, in combination with 7 Billions from customers, the company has transformed into shareholder liability. So now that we have established that it's possible for a company to build wealth for one set of shareholders by transferring it from another set, let's look at the total. Is it positive, or negative? You figure it out. I would say your teaser is more like this: 5.7 Billion people go into a bar stocked with booze they got by pooling $0.50 each. They invite in another 2.3 Billion people, attracted by the sound and the lights. Cover charge ranges from $6 to $80 (average over the night was about $28), payable either to the bouncer at the door in the form of booze or any other party materials. Alternatively, tickets can be obtained from any partier who wishes to leave, or any of the serving staff who get to join the party if they like (at a discount), or give up their place. They sell their tickets to entrants at par to the current cover charge. Fees are used to buy more booze and pay the bartenders and serving staff tripple overtime. Out the back door the bar sells some of the excess booze to folks who can't get in. They sell nearly 90 Billion dollars worth of booze that only cost them 83 Billion to buy in the first place. This party rocks! The next morning there's a pile of booze and empties and cash on the floor worth 28 Billions which everyone in the room agrees to split 8 Billion ways, to everone still in the room. That's $3.50 each. Bartenders and serving staff made tripple overtime and suggest to do it all again tonight. And the crowd in the bar? A little bit hungover, and with no real way to figure out how much they had in their pockets to begin with, the partiers look at each other and say to themselves: heck, if we keep this up, sooner or later we'll have $14 each! And vote to keep the party going another night. Are they being smart? Hard to say. But a few things are known from the facts on the table. First, it's pretty clear that there are 2.3 billion folks in the bar now than there were to begin with. And each of these 2.3 Billion folks parted with AT LEAST $6 and (on average) about $28 in order to enter the room. Who they paid it to is not clear at all. And as external observers we have a devil of a time figuring out how much of this cover charge actually went into paying for booze and party materials! However, we can at least look at it from the outside. From the perspective of the folks who paid the price of admission. There are 5.7 Billion who "paid" about $0.50 and another 2.3 who paid an average of $28 each. There's about $67 Billion in negative wealth accounted for amongst all of the participants. And left behind is this pile of 28 Billions for them to pick through. So the only thing we know for sure is that in total, the CURRENT participants, together are down by $39 Billions. Certainly some of this went into the pockets of folks who were at the party earlier and left. And some of this also flowed into the pockets of bartenders and serving staff. And some made its way into that pile of 28 Billions in the middle of the floor. Unlike our hypothetical bar, Cisco has published scrupulous accounting of the flow of wealth and every dollar of that pile of 28 Billions is accounted for. Reported Revenue 91,285 Reported Costs 82,331 -------------- ----- Reported Earnings: 8,954 Add Back Depreciation 6,213 Minus Cash Capex (7,611) Minus NonCash Capex (6,929) =================== ======= Total Wealth Creation 627 M$ This is perfectly clear. The company created wealth of 9 Billions from customers. Plus another 6 Billions in wealth that it actually created but wrote off against depreciation. In order to do so however, it consumed 7.6 Billions in capital purchased directly, and a further 7 Billions transferred in by the contribution of shareholders. So while the company is better off by about 8 Billions, the shareholders are better off by about half a billion. 'Cause seven billions are what they brought with them to the party. Hardly fair to call this "wealth creation". Next we go to the unreported wages. Another 19 Billions. Also paid by shareholders. Not directly to the company, but laundered through each other and eventually to the employees. So the total wealth creation FOR THE COMPANY has been about 7 Billions. But the total wealth creation for THE COMPANY AND ITS OWNERS is about 18 billion in the hole. John