Description
The CSCO Value line report pdf uploaded is an example of a value line investment report for Cisco System, the Merger Example pdf contains an example of Mergent Online competitor. The JP Morgan file is a model template included here that demonstrates the DCF processes for Cisco Systems (CSCO) using data extracted from various sources, including the Value Line and Mergent videos shown in the previous module and the 2023 JP Morgan Capital Market Assumptions. The pasted information is my lecturer explaining how the project should be carried out : My follow-on question is whether you have read Ch 9? It describes the top down approach, which is what you will be implementing step-by-step through the project. Through this process, you will select a company whose stock you will evaluate quantitatively and qualitatively. The point is not to choose a stock right away but instead to allow the top-down process to help you select a stock/company to evaluate.Hopefully after reading the chapter and then going step-by-step through the project, you will understand completely. As students will discover, aspects of this process involve informed judgment and opinion. Students should be prepared to defend those judgments and opinions they use in this process. Happy value-ing!
Unformatted Attachment Preview
Applied Investment Project1
BSAD 8510
Fall 2022
Purpose
The purpose of this project is to provide students an applied experience in conducting a top-down analysis
of a publicly-traded stock. The deliverable is a report that addresses specific topics in a systematic
manner.
Project Format
Please submit the written report using Times New Roman style, size 11 font, with 1-inch margins. You
can select either single- or double-spaced paragraphs. The complete report should not exceed 10 singlespaced pages, yet you can still earn full credit for effective, succinct writing that fully addresses the
requirements in less pages. For readability, please label the Parts of your report as well as the number of
the item you are addressing. Tables, graphs, and figures can enhance written communication and are
therefore permitted, but please ensure they are utilized effectively, not as space fillers. You are welcome
to use the university’s Writing Center for your report, but it is not required. If you do so, please do not
wait until the night before submission, as that will be too late.
Report Content
The outline for the analysis is as follows:
Part 1: Macro analysis
1. Macro-environment Assessment
2. Industry Assessment
3. Security Selection – High Level
4. Security Selection – Specific (Value Line Filter)
Part 2: Firm analysis
5. SWOT or Porter 5 Forces Analysis (optional Philip Fisher)
6. Risk Assessment (Business and Financial)
7. Management Assessment
8. Economic Assessment (monopoly, oligopoly, perfect competition, etc…)
9. Product(s) Assessment
Part 3: Valuation
10. Financial Statement Analysis/Ratio Analysis
11. Traditional Valuation Approach (Discounted Cash Flow (DCF): DDM, FCFF, FCFE), (P/Earnings,
P/Sales, P/Book Value, P/Cash Flow)
12. Question: Is the intrinsic value above or below market value OR is the stock in equilibrium? Do you
recommend a buy, sell or hold?
Section Details
1. Macro-environment assessment
The intent of this step is for students to gain an understanding for the health of both the U.S. and
world economy. Globalization has forced businesses to integrate across economies and thus an
Based upon: “An Applied Investment Project: Utilizing Traditional and Value Investing Methodologies to Teach
Equity Valuation,” 2018, by Dr. Jeff Bredthauer, with permission.
1
1
appreciation for how different countries affect international supply and demand, as well as exchange
rates, is vitally important to understand before deciding on an industry or firm. As well, this analysis
gives students the opportunity to identify the current business cycle (i.e., peak, trough, expansion,
contraction). Another important consideration for students is to identify economic indicators; an
understanding of leading, coincident, and lagging indicators can help to confirm the business cycle.
Students are advised to consider carefully chapters 8 and 9 of the Reilly, Brown, and Leeds
“Investment Analysis & Portfolio Management” text as a guide for things to consider when assessing
the macro-economic environment. They are also encouraged to use the Value Line Investment
Survey– Selection & Opinion – Economic and Stock Market Commentary to gain a high-level
assessment of the current macro environment. Lastly, students should read the Saint Louis Federal
Reserve Bank’s Beige Book for a detailed assessment of the current and forecasted economic climate.
2. Industry Assessment
Again students are encouraged to seek the guidance in chapter 9 of Reilly, Brown, and Leeds
regarding industry assessment. After identifying the business cycle, students can focus on the
industries that might be enhanced by the current business cycle. For example, defensive industries
perform better during recessionary periods, while cyclicals tend to perform better during the
expansion phase of an economic cycle. Also, by understanding the point in the business cycle,
students can make a more informed choice of industry based upon sensitivity to the cycle. Students
are encouraged to focus on industries that are in the early stage of growth within the business cycle.
3. Security Selection High Level
After selecting an industry poised for growth within the business cycle, students need to select several
firms within the chosen industry for high-level comparative analysis. Students are directed to consider
price earnings ratio (P/E), return on equity (ROE) (or return on invested capital (ROIC)), return on
assets (ROA), Value Line analyst growth assessments, Yahoo and Google Finance growth
assessments, market share, product mix, and management acumen as preliminary criteria for
determining which firm they think has the greatest potential for returning value to shareholders.
4. Security Selection Specific
During this step students will select the publicly traded stock for analysis for their final report. Note:
it is not expected that every stock identified will result in a “Buy” recommendation; recommendations
can also include “Hold” or “Sell” recommendations. In addition to the preliminary criteria listed in
step 3, students should prepare and use quantitative analyses to determine the intrinsic value of the
firm. To assist, there is a pre-developed spreadsheet example on the course website that conducts
discounted cash flow (DCF) analyses for an example firm, Cisco (CSCO).2 In the spreadsheet,
students will see an example of a Dividend Discount Model (DDM) valuation as well as an example
of the free cash-flow to the firm (FCFF) and free cash-flow to equity (FCFE) models used to
determine intrinsic value. The sources of information for the various inputs to these models are
provided in the models themselves, but students should note that the majority of the inputs come from
the Value Line report for the selected firm. A copy of this report is also provided on the course
website as a resource. Students are required to use the Value Line report for their firm of choice, and
the real purpose of this step is for students to ensure sufficient data exists—both past and forecasted
for the future—for the following items on their chosen company’s Value Line Report:
2
This spreadsheet model is based upon the one shown in Chapter 18 of the Bodie, Kane, and Marcus text,
Investments.
2
Sales per Shr (ADR)
“Cash Flow” per Shr (ADR)
Earnings per Shr (ADR)
Gross Div’ds Decl’d /Shr (ADR)
Cap’l Spending per Shr (ADR)
Book Value per Shr (ADR)
Equiv Shrs (ADRs) Outst’g
Avg Ann’l P/E Ratio
Relative P/E Ratio
Avg Ann’l Div;d Yield
Sales
Operating Margin
Depreciation
Net Profit
Income Tax Rate
Net Profit Margin
Working Cap
Long-Term Debt
Shr. Equity
Return on Total Capital
Return on Shr. Equity
Retained to Com Eq
All Div’ds to Net Prof
To reiterate, you should see data available for each of the aforementioned line items (present and
future) on the Value Line Report. Additionally, please verify that the aforementioned line items have
forecast estimates for 4 to 5 years into the future. You will use this data in the future to determine
intrinsic valuation measures.
5. Strengths, Weaknesses, Opportunities, Threats (SWOT) or Porter 5 Forces Analysis3
In this step students are required to perform either a SWOT or Porter 5 Forces analysis. The intention
of this analysis is to qualitatively assess the factors that enhance or detract from the potential
economic benefit for the chosen firm. By assessing the industry structure, competitive strategy and
profitability, students develop a deeper understanding of their firm and its position within the selected
industry.
6. Risk Assessment (Business and Financial Risk)
Business Risk: Business risk is also known as operating leverage. Operating leverage provides an
indication of how much of a firm’s profits come from fixed costs as opposed to variable costs. The
higher the operating leverage (fixed costs) the higher the business risk, and, all else equal, the higher
the fixed costs for a firm, the greater the variability in earnings over the business cycle. For example,
a firm that produces steel will have greater variability in earnings over the business cycle than will a
grocery store because of the higher fixed costs associated with running a steel mill. We use degree of
operating leverage (DOL) as a measure of business risk: DOL (absolute value) = |% change
operating profits (EBIT)| / |% change in sales (SALES)|. Qualitatively, if we compare two
companies and one has higher fixed costs than the other, all else equal, the firm with the higher fixed
3
Michael Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press,
1985).
3
costs will have more business risk and ultimately be more susceptible to fluctuations in the business
cycle.
Financial Risk: Financial risk is the uncertainty of returns to equity holders due to the debt
obligations of the firm. The more financial leverage a firm takes on, the greater the chance of distress
when earnings are insufficient to cover the debt re-payment. Thus the financial risk and business risk
should be considered together. For example, if a firm has low business risk, creditors and
shareholders may be more willing to accept increased debt leverage (to a point) because the firm will
be more likely to make debt re-payment throughout the business cycle. Students use two ratios to
assess a firm’s financial risk: Debt to Equity and Debt to Assets.
7. Management Assessment
One of the very important considerations when buying a company is to understand the management
of the firm. It is crucial to understand if management is honest and straight-forward, if they are direct
when providing quarterly earnings guidance conference calls, if the language used in the annual
report is clear and succinct and if the financial statements are readable and lacking in misleading
language.
Much can be learned about a company by perusing their company web site and reviewing their
financial statements. Additionally, by listening to the quarterly conference call, a great deal can be
gleaned about whether management seems forth coming regarding their plans for the business or not.
Philip A. Fisher’s “Common Stocks and Uncommon Profits”4 outlines 15 points to look for in
common stock/publicly traded firms. The 15 points are excellent things to consider when assessing
management.
1. Does the company have products or services with sufficient market potential to make possible a
sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will
still further increase total sales potentials when the growth potentials of currently attractive
product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will
give the investor important clues as to how outstanding the company may be in relation to its
competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so
that the larger number of shares then outstanding will largely cancel the existing stockholder’s
benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but
“clam up” when troubles and disappointment occur?
15. Does the company have a management of unquestionable integrity?
4
Philip A. Fisher, “Common Stocks and Uncommon Profits: And Other Writings”, Wiley Investment Classics
4
8. Economic Assessment
Another important aspect to assess when researching a firm is to determine whether they are a
monopoly, oligopoly or if they are subject to perfect competition.
A Monopoly would imply the firm has a dominant position such that prices for goods or services are
dictated by the firm. Monopolies are restricted in many jurisdictions and holding a monopolistic
position is often illegal. Governments may grant a monopoly in certain instances where it is optimal
(e.g., a utility provider) or to incentivize risky investment. In contrast, an oligopoly is a small number
of players that dominate a market niche. For example, AT&T, Verizon, and Sprint/T-Mobile largely
control the United States cell phone market. Oligopolies are not illegal if there is no collusion (e.g.,
actual communication with the intent to corner the market) between the parties involved. Dominant
players within an oligopoly can become price leaders and can effectively take the role of monopolist.
Lastly, perfect competition, or something similar, implies price taking and also implies that no
dominant player sets prices.
It is important for investors to know what type of firm they are considering before they invest. By
understanding the type of economic player they are considering within an industry segment, they can
build a better thesis around what kind of control the firm has over their future revenues and cash
flows.
9. Product Assessment
In this step, students need to make an assessment of the product mix of the firm. Are the company’s
products unique (e.g., Apple iPad) or are they similar/substitutes (e.g., Samsung Tablet)? One of the
unique things that Apple has been able to leverage since the advent of the first iPod was brand
loyalty. Once consumers were mentally “locked-in” to the Apple ecosystem it made it very difficult
to give up on the brand. While Apple does not have a monopoly on tablets, MP3 players and cell
phones, they do have a monopoly on iPads, iPods and iPhones and as long as consumers perceive that
the only way they can get those products is through Apple. In this situation Apple ostensibly has a
monopoly on those products and can price their products accordingly.
In addition to assessing the existing products, it’s important to determine what the company plans for
the future. Does the company invest in research and development to create new and innovative
products? Does the company have plans to create disruptive technologies? Does the company have
the expertise to build new products internally or do they need to acquire a new company to get that
skill? Any time the company can develop new and/or disruptive technology from within, that kind of
organic growth is preferable to acquiring it through a merger. Typically, the cash needed to fund an
acquisition is a zero sum proposition with the new revenues produced from the acquisition.
10. Financial Statement Analysis/Ratio Analysis:
We are now ready to begin to quantitatively assess our chosen firm. By now it should be clear that
considerable time has been devoted to qualitatively assessing the firm and at this point, we should
have a pretty good idea if the firm is worthy of continued research.
In order to interpret financial ratios, it is important to compare them to similar companies within an
industry. Besides what you have learned in previous course(s), you can refer to section 8.5 in the text
for additional information on ratio analysis. Clearly comparing the Price/Earnings of a firm like
General Motors to Walmart makes little sense as the two companies are completely different in terms
of market share, scope and products. Thus it is advantageous to compare firms within industry and
over time. By looking at the trend of financial ratios over time much can be learned about whether the
financial condition of the firm is improving or deteriorating. To make comparison relatively
straightforward, you are encouraged to use Mergent Online to select comparative ratios.
5
Financial ratio analysis is covered in a previous course and also section 8.5 in the current course. The
following are examples of ratios that can be readily compared using Mergent Online:
Valuation:
Price History
Earnings per share
P/E ratio
Price to Book
Price to Sales
Market Capitalization
Dividend:
Dividend Yield
Debt and Liquidity Ratios:
Current Ratio
LT Debt to Assets
LT Debt to Equity
Total Debt to Equity
Operating Metrics:
Return on Assets
Return on Equity
Return on Investment
(ROIC)
Stock Metric:
Beta
Margins:
Net Profit Margin
Gross Margin
EBITDA Margin
Operating Margin
Students are asked to obtain comparable information from at least three competitors in order to
perform their comparative analysis. Note: more comparables will almost certainly ensure the analysis
is more robust, and please provide yourself plenty of time to collect and synthesize this information.
11. Traditional Valuation Approach:
The traditional valuation method incorporates both the discounted cash flow (DCF) method as well as
comparable valuation methods. Students should generate an intrinsic value using the methods in
section 8.3 of the textbook. Specifically, using the metrics identified in step 4, students can use the
DCF to analyze the dividend discount model (DDM, if the firm pays dividends), the free cash flow to
the firm (FCFF), and the free cash flow to equity holders (FCFE). The DCF requires pro forma
estimates for cash flows for several years into the future (preferably 4 to 6 years) and then a terminal
value for the last year. The terminal value can be calculated using the Gordon Growth Model, which
equates a constant growth, g, future cash flows and the cost of capital to the current price in the
terminal year. By discounting the estimated cash flows and the terminal value to the present, students
can calculate an intrinsic value for their firm. If the cash flows estimated are dividends (FCFF) and
the values are discounted at the weighted average cost of capital (WACC), the intrinsic valuation will
be for one share (the enterprise value of the firm). For the FCFF, to determine the market equity value
of the firm, the interest-bearing debt must be subtracted from the enterprise value. Finally, the
6
enterprise value minus interest bearing debt must be divided by the total number of shares outstanding
to arrive at an intrinsic value per share.
In contrast, to calculate the intrinsic value using FCFE, the cash flows available to only the equity
holders must be discounted at the cost of equity capital (k), which then must be divided by the total
number of shares outstanding.
It’s also insightful to calculate an intrinsic value using comparables. Using the price earnings ratio
(P/E) a valuation can be determined using an estimate of future earnings. Similarily, Price/Sales,
Price/Book Value, Price/Cash flow and Price/EBITDA can be used to value the firm if estimates for
sales, book value, cash flow or EBITDA can be determined. These valuations can be used to compare
similar firms within an industry or of similar size. Lastly, many times analysts will look to a common
comparable metric within the industry to value a firm. For example, within an industry it may be a
standard practice to determine valuation by taking a multiple of EBITDA. The problem with using
this approach is that without considering changes in working capital or investments in capital
(CAPEX), the analysts would not have a complete picture of the cash flows being used by the firm.
12. The Conclusion: Buy, Hold, or Sell?
Having completed a wealth of qualitative and quantitative analyses, it is time to make the call as an
analyst. And, fortunately, your recommendation can be as objective as you want it to be. For your
future access to your company is not influenced by the recommendation you make. That is, in
practice, analysts’ recommendations are taken with a grain (or pinch?) of salt given that investors
recognize the analysts’ access to key information going forward can be influenced by how positive
they are about the firm(s) they cover. If you were CEO, would you be excited about providing more
and more information to an analyst who persistently recommends selling your stock? All that said, in
this section, the goal is to synthesize the analyses up to this point and make a recommendation to the
portfolio managers or investors going forward. The goals are to summarize your stance in a manner
that is cogent (i.e., clear, logical, convincing) yet succinct.
7
CISCO SYSTEMS NDQ-CSCO
TIMELINESS
SAFETY
TECHNICAL
3 Raised 5/5/23
1 Raised 12/16/16
4 Lowered 6/9/23
BETA .90 (1.00 = Market)
High:
Low:
21.3
15.0
RECENT
PRICE
26.5
20.0
28.6
21.3
30.3
23.0
14.0 RELATIVE
DIV’D
VALUE
Median: 14.0) P/E RATIO 0.76 YLD 3.1%
49.86 P/ERATIO 12.4(Trailing:
LINE
32.0
22.5
39.0
29.8
49.5
37.3
58.2
41.0
50.3
32.4
64.3
43.4
63.3
38.6
52.6
45.6
Target Price Range
2026 2027 2028
LEGENDS
14.0 x ″Cash Flow″ p sh
. . . . Relative Price Strength
Options: Yes
Shaded area indicates recession
120
100
80
64
48
18-Month Target Price Range
Low-High
$42-$68
Midpoint (% to Mid)
$55 (10%)
32
24
20
16
12
2026-28 PROJECTIONS
Ann’l Total
Price
Gain
Return
High
95 (+90%) 20%
Low
75 (+50%) 13%
Institutional Decisions
2Q2022
3Q2022
4Q2022
1417
1384
1479
to Buy
to Sell
1295
1142
1226
Hld’s(000)297776429513793003874
% TOT. RETURN 4/23
Percent
shares
traded
30
20
10
1 yr.
3 yr.
5 yr.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
5.73
6.71
6.24
7.08
7.95
8.69
9.02
9.23
9.67
9.79
9.63 10.69 12.21 11.64
1.43
1.66
1.37
1.73
2.12
2.38
2.45
2.60
2.71
2.82
2.88
3.23
3.69
3.65
1.17
1.31
1.05
1.33
1.62
1.85
2.02
2.06
2.21
2.36
2.39
2.60
3.10
3.21
—-.12
.28
.62
.72
.80
.94
1.10
1.24
1.36
1.42
.21
.22
.17
.18
.22
.21
.22
.25
.24
.23
.19
.18
.21
.18
5.16
5.83
6.68
7.83
8.69
9.68 10.97 11.09 11.74 12.64 13.27
9.36
7.90
8.95
6100.0 5893.0 5785.0 5655.0 5435.0 5298.0 5389.0 5107.0 5085.0 5029.0 4983.0 4614.0 4250.0 4237.0
22.0
20.6
17.7
17.9
11.9
9.7
10.3
11.3
12.3
11.5
13.3
15.1
16.1
14.2
1.17
1.24
1.18
1.14
.75
.62
.58
.59
.62
.60
.67
.82
.86
.73
—-.6%
1.6%
3.0%
3.1%
2.9%
3.5%
3.5%
3.2%
2.7%
3.1%
THIS
STOCK
VL ARITH.*
INDEX
-0.2
22.3
23.2
0.8
65.7
47.7
8
© VALUE LINE PUB. LLC 26-28
11.81 12.54 13.90 14.50 Revenues per sh A
3.68
3.91
4.15
4.40 ‘‘Cash Flow’’ per sh
3.22
3.36
3.80
4.00 Earnings per sh AB
1.46
1.50
1.54
1.58 Div’ds Decl’d per sh E
.16
.12
.20
.20 Cap’l Spending per sh
9.79
9.68 10.70 12.35 Book Value per sh
4217.0 4110.0 4090.0 4030.0 Common Shs Outst’g C
14.5
16.0 Bold figures are Avg Ann’l P/E Ratio
Value Line
.78
.93
Relative P/E Ratio
estimates
3.1%
2.8%
Avg Ann’l Div’d Yield
16.75
5.90
5.30
2.30
.35
16.90
3850.0
16.0
.90
2.7%
58400 Revenues ($mill) A
36.0% Operating Margin
1400 Depreciation ($mill)
16400 Net Profit ($mill)
19.0% Income Tax Rate
28.1% Net Profit Margin
19000 Working Cap’l ($mill)
6650 Long-Term Debt ($mill)
49725 Shr. Equity ($mill)
29.0% Return on Total Cap’l
33.0% Return on Shr. Equity
19.5% Retained to Com Eq
40% All Div’ds to Net Prof
64500
37.0%
2000
20400
19.0%
31.6%
22600
10000
65000
27.0%
31.5%
18.0%
43%
48607 47142 49161 49247 48005 49330 51904 49301
31.0% 31.4% 31.6% 33.4% 32.1% 34.0% 35.9% 37.4%
2351.0 2432.0 2442.0 2150.0 2286.0 2192.0 1897.0 1808.0
10866 10863 11354 12022 12067 12703 13787 13658
20.8% 20.8% 21.7% 21.8% 22.1% 21.0% 19.0% 19.2%
22.4% 23.0% 23.1% 24.4% 25.1% 25.8% 26.6% 27.7%
43329 47305 52660 53808 56120 34802 16043 18242
12928 20401 21457 24483 25725 20331 14475 11578
59120 56654 59698 63586 66137 43204 33571 37920
15.5% 14.5% 14.3% 14.0% 13.6% 20.7% 29.6% 28.2%
18.4% 19.2% 19.0% 18.9% 18.2% 29.4% 41.1% 36.0%
12.8% 12.5% 12.2% 11.4%
9.9% 15.6% 23.3% 20.2%
30%
35%
36%
40%
46%
47%
43%
44%
49818 51557
37.3% 37.4%
1862.0 1957.0
13636 14094
19.1% 18.9%
27.4% 27.3%
12855 11077
9018.0 8416.0
41275 39773
27.5% 29.3%
33.0% 35.4%
18.1% 19.8%
45%
44%
BUSINESS: Cisco Systems, Inc. is a leading provider of Internet
Protocol-based networking and other products for transporting data,
voice, and video across geographically dispersed local-areanetworks, metropolitan-area networks, and wide-area networks.
Devices are primarily integrated by Cisco IOS Software and include
Routers, Switches, New Products, and Other. Provides services as-
sociated with these products. Foreign business accounted for
42.2% of 2022 revenues. R&D, 13.1% of revenues. Has about
83,300 employees. Officers/Directors hold less than 1.0% of stock;
BlackRock, 8.5%; Vanguard, 8.2% (9/22 proxy). Chrmn. & CEO:
Chuck Robbins. Inc.: CA. Addr.: 170 W. Tasman Drive, San Jose,
CA 95134-1706. Tel.: 408-526-4000. Internet: www.cisco.com.
Easing supply constraints present a
double-edged sword for Cisco SysANNUAL RATES Past
Past Est’d ’20-’22 tems. Component availability has imof change (per sh)
10 Yrs.
5 Yrs.
to ’26-’28
proved lately, resulting in lead times dropRevenues
4.5%
4.5%
5.5%
ping 40% on average over the prior two
‘‘Cash Flow’’
6.0%
6.0%
8.0%
Earnings
7.5%
7.0%
8.5%
quarters and a corresponding reduction in
Dividends
27.0%
9.0%
8.0%
the historically elevated backlog. This
Book Value
1.0%
-5.5% 10.0%
helped revenue rise 13.5% year over year
Fiscal QUARTERLY REVENUES ($ mill.) A
Full
Year
Fiscal in the April quarter. Concurrently, as cusEnds Oct.Per Jan.Per Apr.Per Jul.Per Year tomers receive orders quicker than expect2020 13159 12005 11983 12154 49301 ed, they are pausing or slowing new orders
2021 11929 11960 12803 13126 49818 as they work through inventory. The
2022 12900 12720 12835 13102 51557
2023 13632 13592 14571 15035 56830 faster turnaround also lowers the need for
2024 14150 14000 14900 15350 58400 clients to make orders as far in advance as
they previously did. Cisco should end fiscal
Fiscal
Full
EARNINGS PER SHARE AB
Year
Fiscal 2023 with double its regular product backOct.Per
Jan.Per
Apr.Per
Jul.Per
Ends
Year log and plans for this to return to normal
2020
.84
.77
.79
.80
3.21 by early calendar 2024.
2021
.76
.79
.83
.84
3.22 Customers appear increasingly cost2022
.82
.84
.87
.83
3.36
2023
.86
.88
1.00
1.06
3.80 conscious due to macroeconomic un2024
.98
.98
1.02
1.02
4.00 certainty. The backlog drawdown is
making it harder to get a sense of underlyQUARTERLY DIVIDENDS PAID E
CalFull ing demand conditions. That said, there is
endar Mar.31 Jun.30 Sep.30 Dec.31 Year
evidence that they are deteriorating.
2019 .33
.35
.35
.35
1.38 Spending pressure that emerged last year
2020 .35
.36
.36
.36
1.43
2021 .36
.37
.37
.37
1.47 in certain pockets has become more broad2022 .37
.38
.38
.38
1.51 based. This is resulting in elongated sales
cycles; pauses, downsizing, and push-outs
2023 .38
.39
of projects; and lower spending in general,
with customers prioritizing missioncritical needs while increasing scrutiny on
deal approvals elsewhere. Despite relatively easy comparisons, total order growth
was down 23% year over year in the fiscal
third quarter, which compares to a 22%
drop in the second quarter and a 14%
decline in the first quarter.
Our outlook for the intermediate term
is lackluster. The confluence of factors
should remain a headwind, which implies
orders will continue to lag revenue growth
over the next several quarters. The company anticipates a ‘‘modest’’ increase in revenue for fiscal 2024 (likely a low single-digit
rate), with earnings expected to grow
faster than that. Having raised prices
recently, Cisco does not see this coming
down unless lower memory and freight
costs/prices emerge. The forecast also
reflects a higher gross margin, robust
management of expenses, and around $1.2
billion in share buybacks per quarter.
Investors should hold off on any new
commitments for the time being until
demand visibility improves.
Kevin Downing
June 9, 2023
CAPITAL STRUCTURE as of 4/29/23
Total Debt $8.4 bill. Due in 5 years $4.5 bill.
LT Debt $6.7 bill.
LT Interest $375 mill.
(14% of Cap’l)
Leases, Uncapitalized Annual rentals $327 mill.
No Defined Benefit Pension Plan
Pfd Stock None
Common Stock 4,075,058,155 shs.
as of 5/18/23
MARKET CAP: $203 billion (Large Cap)
CURRENT POSITION 2021
2022 4/29/23
($MILL.)
Cash AssetsD
24518 19267 23288
Receivables
5766
6622
5104
Inventory (FIFO)
1559
2568
3474
Other
7269
8260
8084
Current Assets
39112 36717 39950
Accts Payable
2362
2281
2442
Debt Due
2508
1099
1731
Other
21387 22260 24546
Current Liab.
26257 25640 28719
(A) Fiscal year ends on last Saturday in July
(four 13-week quarters). (B) Diluted earnings.
May not sum due to rounding. Next egs. report
due mid-August. GAAP egs. prior to 2011, pro-
56830
36.0%
1300
15650
19.0%
27.5%
12700
6650
43700
31.0%
36.0%
21.0%
41%
forma thereafter. (C) In millions. (D) Long- and in late Jan., April, July, and Oct.
short-term investments in current assets beginning in fiscal 2006.
(E) Dividend commenced March 29, 2011, paid
© 2023 Value Line, Inc. All rights reserved. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind.
THE PUBLISHER IS NOT RESPONSIBLE FOR ANY ERRORS OR OMISSIONS HEREIN. This publication is strictly for subscriber’s own, non-commercial, internal use. No part
of it may be reproduced, resold, stored or transmitted in any printed, electronic or other form, or used for generating or marketing any printed or electronic publication, service or product.
Company’s Financial Strength
Stock’s Price Stability
Price Growth Persistence
Earnings Predictability
A++
95
70
100
To subscribe call 1-800-VALUELINE
Input Values for CSCO*
Beta
Risk-free rate, RFR
Expected Return on Market, E(Rm)
Market Risk Premium
Cost of Equity Capital, k
0,9
0,042
0,085
0,043
0,0807
ROE
Retention (plowback) Ratio, RR
Growth rate, g (using SGR)
0,36
0,59
0,2124
Forecast g (using compounded divs)
0,105
Long-Term g (must be < k)
(Theoretically must be < long-term growth rate in economy)
0,025
Market Share Price
49,86
*Based upon Bodie, Kane, and Marcus Chapter 18 model
**Please note: the model and reality provide ABNORMALLY close values in this situation
Source
Value Line report
JPM Long Term Capital Market Assumptions (Long Treasury)
JPM Long Term Capital Market Assumptions (AC World Equity)
Calculated
CAPM equation
Value Line report
Value Line report (1 minus "All Div'ds to Net Prof")
Calculated
Calculated: interpolated b/w 2023 and 2027 dividends from Value Line
Assumption: long-term growth rate in economy--adjust as appropriate
s in this situation
Year
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
Dividend Div GrowthTerminal Value CF to Investor
1,54
1,54
1,58
1,58
1,75
1,75
1,93
1,93
2,30
0,105
2,30
2,54 0,098775
2,54
2,79 0,092069
2,79
3,05 0,085362
3,05
3,31 0,078655
3,31
3,57 0,071948
3,57
3,83 0,065241
3,83
4,08 0,058534
4,08
4,32 0,051827
4,32
4,54 0,045121
4,54
4,75 0,038414
4,75
4,93 0,031707
4,93
5,08
0,025 93,56820169
98,65
PV of CF
$50,91
Legend & Notes
Value Line report
Other source shown
Linearly interpolated
Calculated
Inputs
P/E
Capital spending/share
LTD (millions)
Shares (millions)
EPS
Working capital (millions)
Cash Flow Calculations
Profits (millions, A-T)
Interest (millions, A-T)
Change in WC (millions)
Depreciation (millions)
Capital spending (millions)
FCFF
FCFE
Discount Rate Calculations
Beta
Unlevered Beta
Terminal Growth
Tax Rate
Cost of Debt (see note in next cell)
RFR
MRP
MV Equity
Debt/Value
Levered Beta
Cost of Equity
WACC
PV factor for FCFF
PV factor for FCFE
Present Values
PV FCFF
PV FCFE
2023
12,4
0,2
6650
4090
3,8
12700
2024
13,3
0,2
6650
4030
4
19000
2025
14,2
0,25
7766,67
3970,00
4,43
20200
2026
15,1
0,30
8883,33
3910,00
4,87
21400
2027
16
0,35
10000
3850
5,3
22600
15650
296,26
16400
296,26
6300
1400
806
17733,3
346,01
1200
1600,0
986,5
19066,7
395,75
1200
1800,0
1167,0
20400
445,50
1200
2000
1347,5
10990,3 17492,8
10694,00 18263,50
18895,4
19616,33
20298,0
20969,17
1300
0,9 From DDM tab
0,876
0,025 From DDM tab--adjust as necessary
0,19
0,055 https://www.finra.org/finra-data/fixed-income/corp-and-agency
0,042 From DDM tab
0,043 From DDM tab
194060
326400
0,033132 0,032281 0,031429 0,030578 0,0297265
0,9
0,899
0,899
0,898
0,897
0,081
0,081
0,081
0,081
0,081
0,080
0,080
0,080
0,080
0,080
Year=
0
1
2
3
4
1
0,926
0,858
0,795
0,736
1
0,925
0,856
0,792
0,733
10180,82 15010,96
9895,69 15638,93
Intrinsic Values
FCFF
FCFE
Firm
Equity
Per Share
336172,4 329522,4
80,6
327893,6 327893,6
80,2
15020,22
15544,23
14946,63
15377,01
Legend & Notes
Value Line report
Other source shown
Linearly interpolated
Calculated
(1-tax)*(cost of debt)*LTD
Terminal Value
381625,7
370151,4
e/corp-and-agency
unlevered beta*(1+(1-tax)*(debt/equity))
0,081 CAPM
0,080 Calculated
4
0,736 Note: using year-by-year WACC adjustments
0,733 Note: using year-by-year WACC adju
