16 August 2009

CSCO: Financial Gauge Analysis for the July 2009 Quarter

In an earlier post, we examined Cisco Systems' (NASDAQ: CSCO) Income Statement for the July quarter and compared the figures to our "look-ahead" estimates.   GAAP earnings in this period, which was the fourth quarter of fiscal 2009, fell from $0.33 to $0.19 per share.

Cisco Systems, Inc., the proud plumber of the Internet, has a dominant (but not unassailable) position in the market for enterprise networking products and services, such as routers.

We have since mined Cisco's financial statements in the earnings announcement to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.

In summary, Cisco's latest GCFR gauge scores are as follows:
  • Overall: 36 of 100 (down from 53)

If necessary, we will update the scores after Cisco Systems files its 10-K report for the year with more detailed information.

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementJul 2009Apr 2009Jul 20085-Yr Avg
Current Ratio3.
Debt/CFO (years)
Inventory/CGS (days)32.430.833.043.8
Finished Goods/Inventory64.4%62.0%67.4%55.1%
Days of Sales Outstanding (days)35.431.636.032.9
Working Capital/Invested Capital218.9%203.1%145.5%128.6%
Cash Conversion Cycle Time (days)45.842.547.550.7
Gauge Score (0 to 25)10151814

In the fiscal year now concluded, Cisco increased its Cash and Short-term Investments from $26.2 billion to $35.0 billion.  Working Capital -- the difference between Current Assets have been less than Current Liabilities -- rose from $21.8 billion to $30.5 billion.

A contributor to the improved liquidity -- not that it was needed -- was a $3.9 billion addition to Long-term Debt.  Is Cisco amassing funds for a large-scale acquisition?

The Inventory level was leaner that it was last year or historically, no easy feat in a recession.  However, it wasn't quite as lean as in the April quarter.

An unwelcome rise in Days of Sales Outstanding could be hinting that efficiency improvements peaked in the April quarter.  However, the significant decline in Revenue makes it harder to interpret the efficiency metrics.
GrowthJul 2009Apr 2009Jul 20085-Yr Avg
Revenue growth-8.7%-1.7%13.2%10.6%
Operating Profit growth7.5%11.0%13.6%5.2%
CFO growth-18.1%1.3%19.6%10.5%
Net Income growth-23.8%-11.3%9.8%3.8%
Gauge Score (0 to 25)11812
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Cisco's Revenue, Net Income, and Cash Flow from Operations all fell substantially in fiscal 2009.  The negative numbers above illustrate vividly the effects of the worldwide decline in information technology spending, especially by businesses.

ProfitabilityJul 2009Apr 2009Jul 20085-Yr Avg
Operating Expenses/Revenue78.1%76.5%74.9%73.9%
Free Cash Flow/Invested Capital61.4%69.4%70.6%65.0%
Accrual Ratio9.1%9.1%0.3%4.7%
Gauge Score (0 to 25)12121715

The upward trend in Operating Expenses as a percentage of Revenue, which dampens Profitability, continued.

Returns on capital remain in all-star territory, but they are weakening.  The big increase in Accrual Ratio is a warning about earnings quality.

ValueJul 2009Apr 2009Jul 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)8171711

Despite the weak economy, the price of Cisco shares rose 14 percent, from $19.32 to $22.01, during the months of May, June and July.   This increase came on top of an even greater climb during the previous three months.  The gauge is hinting that the price rise was excessive, given the operating performance we've seen to date.

Cisco's valuation ratios can be compared with other companies in the Networking & Communication Devices industry.

OverallJul 2009Apr 2009Jul 20085-Yr Avg
Gauge Score (0 to 100)36536553

The results of the July quarter led to drops in the Cash Management and double-weighted Value gauges.  The Growth gauge score remained close to zero, which is a sad state of affairs for a company so used to rapid growth it seemed a birthright.

Full disclosure: Long CSCO at time of writing.

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