23 November 2009

CSCO: Financial Gauge Analysis for the October 2009 Quarter

In a previous article, we examined Cisco Systems' (NASDAQ: CSCO) Income Statement for the first quarter of fiscal 2010 and compared the entries on each line to our "look-ahead" estimatesGAAP earnings in this period, which ended 24 October 2009, fell from $0.37 to $0.30 per share.

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated a set of Cash Management, Growth, Profitability and Value metrics.  This post reports on the metrics and the associated financial gauge scores.

Cisco Systems, the proud plumber of the Internet, has a dominant position in the market for enterprise networking products and services, such as routers.  Some background information about Cisco and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Cisco's latest quarterly results produced the following changes to the gauge scores:

  • Overall: 25 of 100 (down from 36)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash ManagementOct 2009Jul 2009Oct 20085-Yr Avg
Current Ratio3.
Debt/CFO (years)
Inventory/CGS (days)33.532.431.942.8
Finished Goods/Inventory65.2%64.4%64.2%56.1%
Days of Sales Outstanding (days)33.835.430.333.2
Working Capital/Invested Capital211.5%218.9%146.0%139.2%
Cash Conversion Cycle Time (days)44.745.841.550.6
Gauge Score (0 to 25)8101914

In the October 2009 quarter, Cisco added another $360 million to the $35 billion in Cash and Short-term Investments it had amassed at the end of July.  Working Capital -- the difference between Current Assets and Current Liabilities -- rose in the last three months from $30.5 billion to $31.5 billion.

The $10.3 billion in Long-term Debt at the end of October seemed superfluous, and yet Cisco added another $5 billion to its debt load in early November.

Some of the cash is being used to repurchase common shares.  The company stated that during the October quarter, "Cisco repurchased 76 million shares of common stock [...] at an average price of $22.99 per share for an aggregate purchase price of $1.8 billion."

It's natural to wonder, as we did in the past, whether Cisco is amassing funds for a large-scale acquisition.  The offer to purchase Norway's Tandberg (OSL: TAA) for about $3.4 billion, if accepted, would make only a small dent in Cisco's bank account.

The rise of the Inventory level after a few quarters of pruning is not helping the gauge score.

On the other hand, the recent drop in Days of Sales Outstanding is modestly encouraging  However, the significant decline in Revenue makes it harder to interpret the efficiency metrics.

GrowthOct 2009Jul 2009Oct 20085-Yr Avg
Revenue growth-13.7%-8.7%11.1%9.2%
Operating Profit growth3.9%7.5%14.5%4.8%
CFO growth-26.0%-18.1%7.3%7.9%
Net Income growth-28.9%-23.8%1.5%3.2%
Gauge Score (0 to 25)01411
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, which ended in July, and the trend continued in the first quarter of fiscal 2010.  The negative numbers above illustrate vividly the effects of the worldwide decline in information technology spending, especially by businesses.

ProfitabilityOct 2009Jul 2009Oct 20085-Yr Avg
Operating Expenses/Revenue78.3%78.1%75.1%74.3%
Free Cash Flow/Invested Capital52.3%61.4%67.2%63.7%
Accrual Ratio7.9%9.1%3.6%5.8%
Gauge Score (0 to 25)12121415

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 last July in the Accrual Ratio was a warning about earnings quality.  The ratio came down a little in the recent quarter, but not enough to ease our concerns.

ValueOct 2009Jul 2009Oct 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)12.610.47.413.2
Gauge Score (0 to 25)382111
All figures in this table are calculated using the share price on the last day of the listed calendar month.  Depending on how the company defines its fiscal year, this date may differ from the end of the fiscal quarter.

The price of Cisco shares rose from $22.01 to $22.81, during the months of August, September, and October.  This modest increase came on top of greater climbs during the two previous quarters.  The gauge is indicating that the price rise was excessive, given the top- and bottom-line results that have been recorded.

OverallOct 2009Jul 2009Oct 20085-Yr Avg
Gauge Score (0 to 100)25366752

The Cash Management, Growth, and Profitability gauges were stable to slightly weaker after the October quarter, but the ever-contrarian Value gauge took a big hit.  Since the latter is double-weighted, the Overall gauge slumped rather significantly.

The Growth gauge at zero seems sad for a company so used to rapid growth it seemed a birthright.

Full disclosure: Long CSCO at time of writing.

No comments:

Post a Comment