At the beginning of the year, I wrote an article about Dell Computer (DELL) in which I pointed out the analysts were generally understating its balance sheet cash by excluding financing receivables and that DELL's strong balance sheet suggested that it might be a takeover candidate. The article, written when DELL was trading at $9.97, was a "lucky" prediction of what occurred a couple weeks later. I have noticed this same balance sheet issue with another company, Cisco (CSCO); this article analyzes its implications - an imminent takeover is NOT one of them!
Before getting into financing receivables, CSCO appears cheap almost no matter how you calculate its metrics. I have written about CSCO before - here and here - suggesting that it is a very attractive value stock. As time has passed, it has become more attractive. The table below provides Wednesday's closing price, net balance sheet cash (balance sheet cash minus debt) per share, trailing twelve month earnings per share, the price earnings ratio and EPEE (market cap with net cash backed out divided by earnings). All data is based on recent CSCO filings at the SEC.
|Price||Net Cash||TTM EPS||PE||EPEE|
These numbers do not take CSCO's financing receivables into account. In fact, CSCO provides financing (loans and leases) to customers and its website even refers to an operation called Cisco Capital. Its financials disclose details about the financing and the amount carried on the balance sheet also reflects loan loss reserves. The total amount of "financing receivables" on the latest financial statement is some $7.7 billion.
In addition, CSCO (as a completely separate line item on its balance sheet) maintains a large accounts receivable balance, $4.5 billion. This is offset to some degree by $890 million in accounts payable. I have arbitrarily calculated "net receivables" of $3.6 billion for my analysis.
The table below extends the above analysis further. I have calculated CSCO's enterprise price (market cap minus net cash) first backing out only the $5.62 net cash per share described above (EP 1). Then I have treated the financing receivables as cash and backed out an additional $1.44 per share (EP 2). Finally, I have backed out the net receivables of $.67 per share as well (EP 3). In each case, I have calculated a revised price earnings ratio. Again, all data is based on CSCO's SEC filings.
Depending upon exactly how we measure net balance sheet cash, CSCO can wind up with an extremely low PE in the 7s. Of course, receivables are not generally counted as part of balance sheet cash, but CSCO's financing receivables could likely be sold at somewhat of a discount to raise cash. Indeed, the financing receivables are also likely to be part of the reason that CSCO carries some balance sheet debt and the debt is subtracted in calculating net balance sheet cash.
I have recently written about the tendency of stocks to trade based on dividend yield. Of course, one implication is that stocks that are in a good position to increase dividends may perform well in the market. CSCO's balance sheet puts it in this position even without the "hidden value" of its receivables; the receivables should be viewed as icing on an already attractive cake.