Interesting Times for Cisco; Shares Cheap Below $20

Cisco Systems (CSCO) has traditionally been a designer, manufacturer and seller of network and communications technology and services. Two weeks ago the company announced a significant shift in strategy by beginning to compete with Hewlett-Packard (HPQ) in the broader server market. A week earlier CSCO had announced a deeper move into the consumer electronics business with the acquisition of Pure Digital. Very interesting times for CSCO. We decided to have a look at some numbers for CSCO to estimate an intrinsic valuation for the shares. (See Valuecruncher Interactive Analyst Report For CSCO).

Valuecruncher produces a valuation of US$20.39 for CSCO. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 20.3% above the current share price of US$16.95.

Assumptions

• Revenue: Reuters aggregates 27 analysts covering CSCO and the mean estimates of 2009 and 2010 revenues are US$35.9 billion and US$34.8 billion respectively. For our analysis we have used US$36.0 billion in 2009, US$35.0 billion in 2010 and US$40.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 28.0% in 2009 dropping to 26.5% in 2010 then rising back to 28% in 2011. Reuters has CSCO‘s EBITD margin at 27.1% last year and an average of 30.6% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion in 2009, US$1.05 billion in 2010 then US$1.35 billion per annum moving forward.
• Discount Rate: 10.5%.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 14.3% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

Our analysis incorporates the cash and debt on the CSCO balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say? Our model is interactive - you can change any of our assumptions.

Disclosure: None

Comments

[pacman1947:]

Yours appears to be a good model of the pure calculations of cash flow and potential present value. While the projections depend on guesses about markets, economies (CSCO is a global player) and stability of competition, there is no way to predict the impact of disruptors and competitors with newer and more cost-effective technology, especially in the wireless arena. Enterprise wireless technology is about to go through a sea change, bringing cheaper, disruptive technology into play with CSCO's wired solutions. That battle is beyond your model, and may dramatically alter the results.

Mar 31 08:16 AM

[SteveJobs:]

One word. Huawei. Bell Canada won't even buy Nortel now - yup Huawei.

Mar 31 12:34 PM

[Ricard:]

Agreed that CSCO is in an interesting position, but more importantly, one needs to ask whether or not it is in a more advantageous position than it was 10 years ago. During the dot-com boom, CSCO looked unstoppable, projecting 20-30% top and bottom line growth indefinitely. Today, its core products are maturing and subject to more competition (i.e., Huawei). Its new businesses are untested and are quite the wild card in determining whether or not CSCO will once again attain the glamour and splendor it achieved in the late 90s.

Because of these factors, I find INTC to be a better bargain. Its business have not been subject to as gut-wrenching a change, it offers an attractive dividend, and is in a better position in the markets in which it participates. Finally, its cash hoard is comparable, although not as large as CSCO's.

The only caveat to this is that CSCO has always been a glamour stock - if tech re-takes the spotlight, CSCO will more than likely out-perform INTC by a wide margin, unless its new businesses turn out to be disasters in the making.

Mar 31 02:24 PM

[george lucas:]

I disagree. Cisco and Huawei are not direct competitors. Most of what Cisco produces nowadays is not directly matched by Huawei. Even in core networks, which is something that Huawei is trying to have for LTE/SAE sytems, Cisco is far more advanced than Huawei is willing to acknowledge. Of course, things can quickly change, as Ericsson, NSN, and ALU have already found out by themselves.

On Mar 31 12:34 PM SteveJobs wrote:

> One word. Huawei. Bell Canada won't even buy Nortel now - yup Huawei.

Mar 31 03:00 PM

[just.a.guy:]

If Cisco and Huawei are not direct competitors, then where did all of Cisco's market share in China evaporate to as Huawei and ZTE have taken off there in the past several years?

Apr 01 03:18 AM

[george lucas:]

Which markets should those be?


On Apr 01 03:18 AM just.a.guy wrote:

> If Cisco and Huawei are not direct competitors, then where did all
> of Cisco's market share in China evaporate to as Huawei and ZTE have
> taken off there in the past several years?

Apr 01 09:01 AM