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