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Cisco Systems Inc: Cash Flow Valuation Update

|Includes: Cisco Systems, Inc. (CSCO)

Current Price: ~ $19/share
Yield: ~ 2.31%

Cisco Systems is the world's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as video conferencing, web-based collaboration, and data center servers.

Estimated WACC for the firm today is 12.51% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 4523
2004 6508
2005 6876
2006 7127
2007 8853
2008 10821
2009 8892
2010 9165
2011 8905
2012 10365

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ 10%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ 7%

Sustainable Growth Rate: ~ 14%

Scenario 1
Average FCF (2012, 2011, 2010) is $9478 million

  • Start at $9478 million FCF
  • Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 9478
1 10236
2 11055
3 11940
4 12895
5 13926
Terminal Value 120271

The firm's future free cash flows, discounted at a WACC of 12.51%, give a present value for the entire firm (Debt + Equity) of $108717 million. If the firm's fair value of debt is estimated at $18700 million, then the fair value of the firm's equity could be $90017 million. $90017 million / 5310 million outstanding shares is approximately $17 per share and a 20% margin of safety is $14/share.

Scenario 2

All else being equal,

  • Assume a 5-year growth rate in FCF of 8% per year, then 4.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 9478
1 10236
2 11055
3 11940
4 12895
5 13926
Terminal Value 187877
  • Present Value of the entire firm (Debt + Equity): $146225 million
  • Value of Equity: $127525 million or $24/share
  • 20% margin of safety is $19/share

Sources

Morningstar.com

Yahoo! Finance

Cisco.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.