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

To: bofp who wrote (62796)	1/28/2003 6:13:07 PM
From: RetiredNow	Respond to of 77400

Right, bofp. Good post. I think John's contention is that Cisco hasn't delivered a whole lot of adjusted earnings in his estimation over the last 10 years, so there seems to be little chance that they will do so in the future. I on the other hand believe that Cisco has used all of that money they received from shareholders and free cash flow to build a tremendous wealth generation machine. But here's the caveat: management still has their hand on the off switch. They need to flip the switch to on. The way to do this in my opinion is to drastically curtail stock options issuance, use cash in lieu of options in their acquisitions, institute a steady, long term buy-back program, and potentially consider issuing dividends every quarter. If they do those things, then that will turn the tremendous free cash flow machine towards benefitting shareholders most of all. That is the only thing that has been lacking in the past. I think John Shannon is right when he says that the company and employees benefitted the most from the last 10 years. So now it's time for shareholders to get their piece of the pie.

To: bofp who wrote (62796)	1/29/2003 12:15:49 AM
From: Stock Farmer	Respond to of 77400

bofp: You are exactly right: the value of a share is not its claim on existing assets. It's a claim on the future assets (either retained and distributed at liquidation, or distributed along the way). My whole point (as mindmeld indicated) is that the company has not created and is not actually creating any wealth in which shareholders can hope to share. Not when we factor in what it is costing shareholders to partake in whatever future wealth creation might suddenly spring into existence in the future. In the latest 10-Q we see that all of Cisco's profits and then some went into reduction of outstanding shares, to net an insignificant amount (if you subtract the exact number of shares at the time the last 10-Q was filed from the exact number of shares at the time the 10-K was filed. And this is not counting any invisible deferred compensation that any stock options might represent. If this recent quarter is representative of the future business then the company is not worth the assets it currently posesses. Despite any of the "free cash flows" to which many of the uninitiated like to point. As an example of the future profitability of the firm, frankly it sucks. As an example of the difference in profitability versus the last six years however, quite a nice step in the right direction. For the first time in a long time the wealth building hasn't been unambiguously negative. Each of these is only an example. Recently my examples are all designed to illustrate how a company can appear to be building a tremendous pile of assets and at the same time be a net negative source of "wealth creation". They are not intended to be complete or conclusive, or even precisely representative of reality (which is far more complex than we have the time to go into), merely illustrative. And close enough for government work. My little contrived example was merely a counter to your suggested equation to measure the creation of wealth. With which I disagree. I think if you go back and look at your suggestion that you will discover your equation delivers a positive value for wealth creation while according to the facts I provided in my construction, a true value should have been negative. Conjuring up additional facts and special cases is hardly the way to demonstrate a general principle. Unless you were proposing a general principle that applies only under certain circumstances? Hmmm... Anyway, this series of posts all stems from an assertion somewhere back along the line that the best way for us to estimate the future value of the company is to look at its free cash flows. My observations are designed to help shed some light on why this process (which is appealing in its simplicity) is dangerously naive. And I have done this by looking at the actual trail of "wealth flows" by a company over a six year period of time. Which trail has been horrendously negative (for shareholders), all the while the "free cash flows" have been stunningly large. All that glitters is not gold. While I am indeed an advocate of watching free cash flows and preferencing these as a proxy for profit, I am also keenly aware that the business processes by which these are generated need to be examined. If only for sustainability under scale. And when I see a process whose sustainability by and large depends on ever increasing number of shareholders to step up to the plate and chip in so that the shareholders who came before can benefit... well, the words "ponzi scheme" spring to mind. Cisco is a great franchise. And there certainly is a great deal of intangible value in the channel it has created in addition to the tangible assets it currently has under management. And it may seem that I have no appreciation of the potential value that intangible assets are likely to bring to the table. Not so. It is very easy to misjudge the value of intangible assets. I operate on the theory that intangible assets are valuable, but only to the extent that there appears to be a process of converting these intangible assets into tangible stuff. At least as tangible as the stuff to which shareholders must apply it. Like rent. If you own this great asset and it doesn't act to create tangible value, either (a) it isn't such a great asset after all, or (b) you are not using it effectively. To a shareholder, where the company consists of both the assets and the management that put them to use, there is no difference. John