24 November 2008

CSCO: Financial Analysis through October 2008 (Updated)

We previously posted an analysis of Cisco System's press release announcing results for the three months that ended on 25 October 2008, which was the first quarter of the company's fiscal 2009.

The company later submitted a more complete 10-Q, which we reviewed to determine if the analysis needed updating.

Cisco Systems, Inc. (NASDAQ: CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking products and services, such as routers.

The additional data in the 10-Q did not change any gauge scores from our initial evaluation, nor did the formal report materially affect our earlier evaluation of Cisco's Income Statement for the first fiscal quarter.
The contrarian Value gauge score tends to move in the opposite direction of the share price. The score increase shown above can be attributed to the shares falling from $21.99 on 31 July to $17.77 on 31 October.  Per GCFR standard practice, the Value gauge score is computed with the share price at, or near, the end of the subject quarter.

Cisco shares continued to drop after the quarter ended, reaching about $14.50, before recovering to $15.17 on 21 November. As can be seen in the table below, the additional decline in the price per share added 3 more points to the Value gauge score.

Value 21 November 200831 October 2008 31 July 2008 31 October 2007 5-year
P/E 11.313.2 16.5 26.4 23.0
P/E to S&P 500 average P/E 80%94% 91% 152% 134%
Price/Revenue 2.22.6 3.4 5.8 5.0
Enterprise Value/Cash Flow (EV/CFO) 6.07.4 9.4 17.5 15.1
Gauge Score (0 to 25) 2320 16 0 11

Although the 10-Q didn't change the GCFR gauges, the filing still provided a much interesting information.

For example, both of Cisco's acquisitions during the quarter have technology that directly benefits end users. As mentioned above, we normally think of Cisco has an expert in the invisible (but vital) network plumbing.

We continued to be intrigued by Cisco's purchase of Nuova Systems, Inc., which developed technologies for enterprise data centers. Cisco first bought approximately 80 percent of Nuova in August 2006. Earlier this year, Cisco exercised an option to purchase the remaining 20 or so percent. The selling shareholders, which included several former Cisco execs, will receive up to three payments, to be made between fiscal years 2010 and 2012, with the amounts determined by an undisclosed formula.

Cisco originally indicated that the potential payout for the remaining interests in Nuova would be between $10 and $578 million. The latest 10-Q states that Cisco has recorded total compensation charges of $296 million for these payments. The amount can be adjusted as high as $678 million, $100 million more than the amount first cited. Since Nuova had 76 employees in August 2006, the total charge to Cisco will be between $3.9 and $8.9 million per Nuova employee.

No comments:

Post a Comment