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The Street wasn't thrilled with Cisco's (CSCO) FQ2 report, but L.D. Salmanson likes what he saw....

The Street wasn't thrilled with Cisco's (CSCO) FQ2 report, but L.D. Salmanson likes what he saw. Cisco's dominant position in the 10-Gig Ethernet switch market, and leading position in the market for "edge" routers and switches, often used to support mobile and cloud infrastructures, is giving it a boost. As is the strength of its UCS server line, whose networking capabilities are proving popular with enterprises.
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  • Keep It Simple
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    Cisco currently trades "private industry" cheap.

     

    Check it out:

     

    a) TTM Earnings = $7B
    b) Current Market Cap = $107B
    c) Cash on Hand = $46.7B
    d) Shares Outstanding = 5.375B

     

    e) Cash on Hand per Share = c / d = 46.7 / 5.375 = $8.69

     

    f) Business value without cash per share = (b - c) / d = (107 - 46.7) / 5.375 = 60.3 / 5.375 = $11.22

     

    g) Business without cash P/E = (b - c) / a = 60.3 / 7 = 8.61 P/E

     

    Most solid private businesses are purchased in the 6 - 8x earnings range. That would give Cisco a private value of around:

     

    (6 * a) + c = (6 * 6.4) + 45 = 38.4 + 45 = 83.4
    (8 * a) + c = (8 * 6.4) + 45 = 51.2 + 45 = 96.2

     

    $83-96B

     

    News flash - Cisco isn't private. Cisco just broke past $20/share resistance and will eventually jump even higher on this arbitrage.

     

    $83-96 in Private. CSCO is a publicly held company, so no. 15x Earnings would easily be appropriate.

     

    (15 * a) + c = (15 * 7) + 45 = 105 + 46.7 = $151.7B

     

    Based on Current Outstanding Shares of 5.375B, that's gives you a valuation of $28.22 per share - a 42% premium to today's $19.88...

     

    Note: My above calculations were very rough.

     

    When I sit down and do the actual work, I personally calculate true owner earnings:

     

    (reported earnings) + (depreciation, depletion, amortization, and certain other non-cash charges) - (the 10-year average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume)

     

    Then I'll run the number again using a 5-year average annual amount of capex.
    14 Feb 2012, 01:56 PM Reply Like
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