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Cisco Systems, Inc: cash flow valuation

|Includes: Cisco Systems, Inc. (CSCO)

Current Price: ~ $17/share
Projected Yield: ~ 1.37%



I believe Cisco Systems, Inc. ($CSCO) is fairly valued at $19/share on a cash flow valuation basis.    


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.


I estimated the firm's WACC today at 12.52% using the Capital Asset Pricing Model and the company's recent SEC filings.
 

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2001
4121
2002
3946
2003
4523
2004
6508
2005
6876
2006
7127
2007
8853
2008
10821
2009
8892
2010
9165


Average Annual Growth FCF: approx. 11%
CAGR FCF: approx. 9%
Consensus Forecast Industry 5-Year Growth: approx. 18% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
 
Assuming the company achieves a 5-year growth rate in FCF of 11% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
9165
1
10173
2
11292
3
12534
4
13913
5
15444
Terminal Value
136869


The firm's future cash flows, discounted at a WACC of 12.52%, give a present value for the entire firm (Debt + Equity) of $119,865 million. If the firm's fair value of debt is estimated at $17,000 million, then the fair value of the firm's equity could be $102,865 million.  $102,865 million / 5530 million outstanding shares is approximately $19 per share and a 20% margin of safety is $15/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.