|Shares Out. (in M):||5,528||P/E||13.2x||11.4x|
|Market Cap (in $M):||100,167||P/FCF||11.0x||11.0x|
|Net Debt (in $M):||-25,000||EBIT||9,164||8,705|
Street EPS estimates for the year ended 7/31/11 and 7/31/12 are $1.60 and 1.76 respectively. The company has $4.47 in net cash per share. At the current $18 stock price, netting out an estimated value of $3.65 for the excess $4.47 per share in cash, CSCO is trading at 9x 2011 Street EPS estimates. If we adjust the Street estimates for stock option expense and add back non-cash amortization expenses, the shares are trading at about 10x 2011 EPS. In comparison, the S&P 500 currently trades for over 15x 2011 EPS.
The company is facing macro-economic headwinds and increasing competitive pressures which are likely to impact margins and growth. However, given the company's long history of profitable growth, the diversity of the business in terms of product and geography, and the company's high margins/market share in a growing industry, the valuation today is attractive.
For our target price, we apply a 14x multiple to the $1.60 of 2011 earnings and add back $3.65 of cash. Our target is $26, up over 40% from today. At today's price, we view our downside potential at around $15, for an attractive upside/downside ratio.
The company has repurchased ~$65B of stock in past decade. Even after adjusting for an $11B of cash stock expense due to issued shares over this period of time, the amount of substantial. Last November, they authorized an additional $10B for buybacks. The company places buybacks front and center in its press-releases, which is a good sign in our view. From the most recent earnings release: "During the second quarter of fiscal 2011, Cisco repurchased 89 million shares of common stock under the stock repurchase program at an average price of $20.15 per share for an aggregate purchase price of $1.8 billion. As of January 29, 2011, Cisco had repurchased and retired 3.3 billion shares of Cisco common stock at an average price of $20.81 per share for an aggregate purchase price of approximately $69.3 billion since the inception of the stock repurchase program. On November 18, 2010, Cisco's board of directors authorized up to $10 billion in additional repurchases of its common stock under the stock repurchase program, increasing the authorized amount of aggregate stock repurchases to $82 billion. The remaining authorized amount for stock repurchases under this program, including this additional authorization, is approximately $12.7 billion with no termination date."
The company is planning a new dividend. While they have not had one in the past, they are planning to initiate a 1-2% dividend yield in 2011. This may be a mild positive for the company.There is abundant research on the company which we suggest you review. We provides some of our notes below, but would welcome any comments or questions as this is one of the prime advantages of VIC.
Business quality - margins, market share, growth
|Subject||gocanucks and shoshin|
|Entry||03/11/2011 01:17 PM|
I'm not an expert on the networking industry by any means, but where do you guys think "normalized" margins for Cisco will fall to? Will they halve? The way I see it, you have a 99bn market cap company with more than 25bn in net cash generating 10bn in cash flow a year, buying back 7-8bn in stock a year. So say that cash flow halves gradually over the next 10-15 years. At what stock price does that still result in a decent IRR? Even declining businesses in today's market trade at 8x earnings. And is it even realistic to say that cash flows will halve when the overall network equipment market is growing at 8-10% a year and management is targeting at least that level of top-line growth?
Also, can you explain why your competition-related arguments wouldn't affect Juniper equally? Juniper runs gross margins even higher than Cisco, and yet the market gives it a 36x earnings multiple. Is there any reason to believe that Juniper is cost-advantaged in manufacturing vs. Cisco over the long-run? Or otherwise advantaged?
Full disclosure: I don't own a position here but am obviously sympathetic and sniffing around.
|Entry||03/11/2011 02:13 PM|
I was surprised to see people giving this idea a 3, and I would like to hear from the bears about the moat. As cxix gets at, in order to be short this at 8x, you must believe the moat is going to collapse, not simply fade away.
I see Cisco where MSFT was a few years ago (when stock was at $20). My feeling is that the demise of their moat is greatly exaggerated on their core (router/switch) product line. Yes, you can buy alternative solutions for a fraction of the price, but this has always been true of almost all digital moats. And has certainly been true of routers/switches since their inception.
Isn't the key that if you are a medium-to-large enterprise, you rely on interoperability and system management. If your IT staff knows Cisco, you will buy Cisco. You could get an alternative system for free, but the total cost of ownership would be so high, the Cisco solution would be cheaper. If you are a small enterprise that is technically savvy, this might not be true. But the loss of these customers would be insignificant.
This challenge frequently happens with technology moats. The core product lines of MSFT (Office, client Windows, server Windows) have been sub-standard from a standalone technology veiwpoint for decades. Unix and Linux were supposed to take out server Windows because IT guys could work through the complexity of interop and learning a new OS. And Linux solutions were supposed to slash software costs (not only is the OS almost free, but the apps are cheaper too!) Did not happen. Will not happen. Certainly, top-notch computer guys switched (many of whom worked for MSFT previously), but most IT guys are not that smart or ambitious. And there was a critical mass of IT guys that knew Windows. The switching costs are huge and if you are a CIO (or similar), the career risk in these decisions is not worth it even if the expected value of the switch is positive. CIOs are inherently risk-averse people and their payoff structure is such that they get fired if the transition goes badly but merely a "good job" if things go swell.
I do not think this point can be over-stated. Why do boards choose Goldman Sachs to do their investment banking. why not force price competition and go with lower priced solution? Wouldn't most people agree that this would increase value from an expectations perspective? But board is not incented that way. Nobody looks stupid choosing Goldman Sachs. A lot of moats are based on this principal-agent principle.
As well, unless you think Chambers is lying, there has not been significant deterioriation in the margin of the core biz. There certainly has been pressure in the non-core biz. As well, overall margins have fallen simply as the mix has changed and the core biz has shrunk in terms of percent of revenue.
I think the margin will hold and I think the stock will slowly turn around as tech/growth investors flee and value investors enter. This transition took a long time in the case of MSFT.
|Entry||04/29/2011 10:56 PM|
one issue I wrestle with in relation to CSCO is that it spends large amounts of its FCF (or EBIT, EBITDA or whatever measure one likes) for acquisitions. So it seems in practice that the reinvestment in the business required to maintain/grow earnings has been quite large, calling seriously into question the profitability/ROIC of the company.
|Entry||05/12/2011 12:22 PM|
What do you think after q3 numbers? My defense of company rested on enterprise router and switch biz remaining strong. However, these numbers clearly point to weakness in the switch business. They appear to be cannabalizing their high-end switches with lower-end switches. I doubt they are cannabalizing for no reason. They are cannabalizing because if they do not, competitor will take the biz.
what do you think?
|Subject||RE: Author Exit Recommendation|
|Entry||07/19/2013 10:03 AM|
any reason as to why? thanks....