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

To: RetiredNow who wrote (63026)	2/8/2003 1:59:47 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Mind, you slipped a decimal point. And missed another point altogether. Go back and work it out. Shareholders have claim to: Year 1: Assets net of liabilities: $1000 Add Income: $ 10 Proceeds from stock option exercise: $ 10 Cost of stock buyback: $ (20) Total: $1000 Shares: 100 Value: $10/share Year 2: Assets net of liabilities: $1000 Add Income: $ 10 Proceeds from stock option exercise: $ 10 Cost of stock buyback: $ (20) Total: $1000 Shares: 100 Value: $10/share And so on, year after year The company I constructed is worth $10 per share, no more and no less. Because that's all the owners can get out of the company. Ever. Assume they figured they could get more. The only way they could do so would be to stop issuing those dilution creation devices. Which presumably are underpinning those earnings of $0.10 (per share, per year). Since the buyback is costing owners another $0.10 per share per year the company is running in place. In the case of Cisco they are generating more cash than it costs them offset stock option dilution, since they are managing to reduce shares outstanding while spending 100% of free cash flow to do so. However, they are not increasing the value to shareholders at the total rate of which they are generating cash. Cash comes in, cash goes out, assets remain the same but shares are reduced. So the owners (who didn't sell) end up having their assets increased, but only by the % decrease in share count, not by the total free cash flow. In the recent report we can see Cisco has maintained shareholder equity essentially flat but decreased shares outstanding by 2% over the past year. So this has increased the net worth of shareholders by a smidge over 2%. Approximately equivalent to a daily interest savings account. John

To: RetiredNow who wrote (63026)	2/8/2003 2:12:00 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Here's a prediction for you. If the powers that be decide that all companies need to expense stock options, which I give a 50% chance of occurring, then I think the probability is extraordinarily high that you'll see Cisco either stop issuing options or cut it back dramatically (90% probability). And if that occurs, I would bet we'd see a very quick rise in the stock to the $20 per share level. I created a decision tree based on these probabilities to calculate an expected value and that came out to $19.20 per share. Good luck. I believe a few things will happen. I think that employees will want fewer stock options but higher cash wages. What will happen is that reported costs will increase and converge on actual costs, which will be decreased. In other words, Cisco will become more productive per dollar spent! Although it will appear less productive on an as-reported basis. In other words, Cisco will be a better investment at any given price than it is now at that same price. Doesn't mean the price should go up (better could just be less bad but still bad), just that it won't be as far off the mark as it is now. Depending on the degree to which the market factors in as-reported profitability versus as-delivered profitability we could see prices go up or down. As far as Cisco being a good buy at this level? Only if you are speculating, not if you are buying wealth creation [my opinion]. John