Cisco Currently Looks Cheap

Last week Cisco (CSCO) announced its 4th quarter results. The response was pretty positive but analysts were concerned about a lack of guidance from the data-networking equipment and software giant.

At Valuecruncher we decided to put some numbers around the potential future performance of CSCO using our on-line valuation tool.

CSCO Valuation

CSCO grew revenues from $22.0 billion in 2004 to $39.5 billion in 2008 – a 15.7% compound annual growth rate. Our assumptions of revenues for the next three years are $43.5 billion in 2009 growing to $52.5 billion in 2011 – a 10% compound annual growth rate. We have projected EBITDA margins to grow from 29.0% in 2009 to 30.0% in 2011. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 10% dropping to a 4.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$1.25 billion. We have used a WACC (discount rate) of 10.5%.

The key assumptions as we see them are:

• CSCO Revenues for the next three years. We believe that 10% per annum growth is a reasonable estimate to start with.
• CSCO EBITDA margins. We are comfortable with a slight rise. 2011 EBITDA margins in the 29-31% range appear reasonable.
• CSCO WACC. We view CSCO’s WACC in the 10-11% range. We took a mid-point.

Valuecruncher valuation model of CSCO with interactive assumptions

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

Our analysis gives a valuation of $28.51 per share, which is 19% above the current share price of $23.93.

Based on our analysis the current share price looks cheap. Play with our assumptions – what does your analysis say?

Comments

[frs:]

Thanks - good article and good data. This stock is definitely undervalued with a overly-compressed forward P/E - I'm looking to CSCO to rise 15%-20% over the next 3-4 quarters.

2008 Aug 08 04:53 PM

[David H. Deans:]

Thank you for sharing this insightful commentary and data.

2008 Aug 15 11:26 AM