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

To: Stock Farmer who wrote (63034)	2/10/2003 1:50:58 AM
From: rkral	Read Replies (1) \| Respond to of 77400

John, re "So I err on the side of assuming management is being honest but not totally forthcoming with the truth. So I look for the unreported costs (which aren't required by law to be reported as costs) and factor them in ... " I agree. Let's factor them in for CSCO. As of 1Q2003: Retained earnings $7.53B Common stock & paid-in capital $20.88B Other $0.14B ----- Total stockholders' equity $28.55B Retained earnings percentage of the total seem low? Wait until we factor in the $5.67B after-tax non-cash expenses since July 1995, the expense reported in the SFAS 123 footnotes. Stockholders' equity would then be: Retained earnings $1.86B Common stock & paid-in capital $26.55B Other $0.14B ----- Total stockholders' equity $28.55B $5.67B moved from Retained Earnings to Paid-in Capital, but stockholders' equity is unchanged. But a similar comparison for FCF would show a huge impact, I suspect. After all, FCF from operating activities would be reduced by $5.67B. (I'm a FCF novice, so don't really know how to present this argument.) So the investor who values companies on a price-to-book basis sees no impact from expensing options. But the investor who uses FCF and DFCF to value companies would see a huge impact. And what about return-on-equity? Retained Earnings and Stockholders' equity reported FY1995 is $3.33B and $5.33B, respectively. Retained Earnings dropped from $3.33B to $1.86B over 7.25 years. Ouch! Looks like negative ROE to me. Net Income for one or more of those 7 years must be negative, after accounting for stock option expenses. Geez! My really small CSCO investment may be $0 as soon as the market opens. :-(( Ron

To: Stock Farmer who wrote (63034)	2/10/2003 12:25:20 PM
From: RetiredNow	Read Replies (2) \| Respond to of 77400

Well, I haven't checked the latest financials to get the average exercise price, but I think it's fairly high for employees that joined the company in the last 3 years. That means that it's going to take them a long time before they are worth anything decent. Remember, most employees don't stay at a company much more than 4 years. So thinking that those employees who are there today will still be there 9 years from now is not a good bet. As far as what could happen in the very near future, again I would bet my two front teeth that Cisco curtails their options program if they had to start expensing them. That not only applies to Cisco, but also to Microsoft and other tech companies. Anyway, John, I may be a little on the optimistic side about Cisco, but I continue to think you're a little on the pessimistic side. Take away the one thing they are doing wrong (issuing too many options) and you'd have arguably one of the best run franchises in the U.S. That's worthy of an investment, especially at today's prices.