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
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
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.
|
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
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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