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

To: Don Lloyd who wrote (64571)	9/15/2003 3:02:00 AM
From: Elroy	Respond to of 77400

Ho hum, this options discussion gets pretty dull after a few years...... Anyone have an argument supporting CSCO's valuation relative to Dell's? Over the next four quatrers CSCO is expected to grow revenues 8% and EPS 9% over the preceding 4 quarters. Dell is expected to grow revenues 15% and EPS 21%. However, CSCO trades at 32x forward EPS while Dell trades at 31x. Seems Dell should trade at a premium since it has double CSCO's growth outlook. Elroy

To: Don Lloyd who wrote (64571)	9/15/2003 3:37:48 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Don, yes, you did misunderstand. But I will do it your way if that makes it easier. Let's have our company (I will call it XYZ) attract 10+X M$ per year in revenues. And let's have cash cost of wages be X M$. Furthermore, let's have employees demand an additional 20 M$ in equity compensation in order to do the job. Accounting method #1 has XYZ earning (10) M$ per year loss by counting the equity compensation as an expense. Accounting method #2 has XYZ earning 10 M$ per year by relegating this equity compensation to a footnote and only considering cash. We want to know which accounting method is more closely representative of what is going on. So I ask how it compares to two other examples where the accounting is unambiguous. Is it equivalent in profitability and sustainability to Company ABC which earns 10+X M$ in revenues each year and spends X M$ in cash compensation? Or is it equivalent in profitability and sustainability to company PDQ which earns 10+X M$ in revenues each year but spends 20+X M$ in cash compensation? I have showed that it is equal to PDQ on both counts. Since we know the accounting for PDQ should reflect a (10) M$ per year loss, and that PDQ and XYZ are equivalent business models from an operating perspective (although they might differ from a financing perspective) we know to choose accounting method #1 as the most representative method of accounting for operating results. Pretty clear. You objected to the illustrative assumption that shareholders purchase 20 M$ equity from insiders. This was not necessary. A creation of 20 M$ in new shares means that between employees who received the equity and the subsequent shareholders, whoever they are, there is a total of 20 M$ in foregone cash. I merely used an artifice to ascribe this cash source to the current shareholders because it makes explaining easier. But in actual practice as I indicated later (and which you perhaps missed), it is actually indistinguishable from an equity financing, which does not preclude the possibility of new shareholders coming to the table. When all of the money flows are followed to their end, the conclusion still stands. XYZ and PDQ are the same from an investment value perspective and therefore equivalently sustainable. XYZ and PDQ are also the same from an operating cost perspective. Consequently XYZ and PDQ should present the same accounting. Namely a (10) M$ bottom line.