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Cisco (NASDAQ:CSCO) reported an OK quarter recently and provided guidance that the Street went gangbusters over, sending the stock up more than 10% following the report. Shares have been on a tear of late, up about two-thirds from the 52-week lows around $15 to trade near $24 as of the time of this writing. Even with the run-up, shares still yield almost 3%, easily besting the 10-year Treasury. The question for investors is: After the huge run, do shares have any gas left in the tank? This article will attempt to assign a valuation to Cisco's business and determine if the run will continue.

To do this, I'll use a DCF-type analysis that requires some estimations: 1) earnings growth assumptions from Yahoo Finance, 2) a dividend growth rate of 12% per annum, and 3) a 10% discount rate. You may not agree with my dividend growth rate or discount rate, but I have used what I believe to be reasonable assumptions. Remember that any forecast is subject to conjecture.

2013

2014

2015

2016

2017

2018

Earnings Forecast

Reported earnings per share

$1.99

$2.10

$2.28

$2.47

$2.67

x(1+Forecasted earnings growth)

5.70%

8.30%

8.30%

8.30%

8.30%

Forecasted earnings per share

$1.99

$2.10

$2.28

$2.47

$2.67

$2.89

Equity Book Value Forecasts

Equity book value at beginning of year

$10.43

$11.74

$13.08

$14.51

$16.02

$17.62

Earnings per share

$1.99

$2.10

$2.28

$2.47

$2.67

$2.89

-Dividends per share

$0.68

$0.76

$0.85

$0.96

$1.07

$1.20

Equity book value at end of year

$10.43

$11.74

$13.08

$14.51

$16.02

$17.62

$19.32

x Equity cost of capital

10.00%

10.00%

10.00%

10.00%

10.00%

10.00%

Normal earnings

$1.17

$1.31

$1.45

$1.60

$1.76

$1.93

Forecasted EPS

$1.99

$2.10

$2.28

$2.47

$2.67

$2.89

-Normal earnings

$1.17

$1.31

$1.45

$1.60

$1.76

$1.93

Abnormal earnings

$0.82

$0.80

$0.83

$0.87

$0.91

$0.96

x discount factor (10%)

0.909

0.826

0.751

0.683

0.621

0.564

Abnormal earnings disc to present

$0.74

$0.66

$0.62

$0.59

$0.56

$0.54

Abnormal earnings in year +6

$0.54

Assumed long-term growth rate

3.00%

Value of terminal year

$18.63

Estimated share price

Sum of discounted AE over horizon

$3.72

+PV of terminal year AE

$10.51

PV of all AE

$14.23

+Current equity book value

$10.43

Estimated Current share price

$24.66

We can see here that my model suggests Cisco's fair value is currently between $24 and $25 per share. This is based on management's ability to earn a profit on the company's asset base. It is also important to understand what the estimated current share price represents. This is the estimated present value of the company's asset base plus estimated future earnings. Therefore, $24.66 is not a nominal price target; rather, it is the price at which shares are a "good value" today. As shares are trading about 3% under this number as of this writing, shares represent a decent value at present.

At current prices, Cisco sports a forward P/E of 11.4, which is quite high for a mature tech company (just ask Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) or Dell (NASDAQ:DELL) shareholders). While I will admit that Cisco is growing earnings at a decent pace given the company's size and its position in its industry, one must be careful with a P/E that is over 11 as strange as that sounds, as "old tech" companies generally can't command market P/E ratios for long. Cisco is not there yet, but let's not lose sight of the fact that CSCO shares were trading for a forward P/E of 8 not very long ago.

In terms of nominal price targets, if Cisco can maintain its forward P/E of 11, which I would argue is unlikely, earnings of $2.89 in 2018 would suggest a nominal price of about $32. However, if Cisco reverts back to a forward P/E of 8, we would see shares trading at around $24 on the same amount of earnings. The point is that an additional 33% of price appreciation over five years isn't exactly gangbusters, and under the more pessimistic scenario, you would only collect dividends for the next five years. This illustrates the point I made about the margin of safety disappearing from the shares as the risk has shifted to the downside, in my view.

The bottom line is that the cost-cutting efforts that have persisted at Cisco for the past couple of years are obviously paying off, with the bottom line -- and shareholders -- benefiting in sympathy. I would argue, however, that Cisco has pretty much reached its fair value and that the margin of safety that was built into owning the shares is probably gone at this point. That isn't to say that shares won't keep rising, but what I am suggesting is that there are safer places to put your money on a valuation basis than Cisco. The dividend is great, but with the yield now under 3% you've got better choices for income as well.

Source: Cisco: After New Highs, What's Next?