83736001.html?mg=com-wsj”>announced a significant shift in strategy by beginning to compete with Hewlett-Packard ($HPQ) in the broader server market. A week earlier $CSCO had announced a deeper move into the consumer electronics business with the acquisition of Pure Digital. Very interesting times for $CSCO. We decided to have a look at some numbers for $CSCO to estimate an intrinsic valuation for the shares.
Valuecruncher produces a valuation of US$20.39 for $CSCO. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 20.3% above the current share price of US$16.95.
- Revenue: Reuters aggregates 27 analysts covering $CSCO and the mean estimates of 2009 and 2010 revenues are US$35.9 billion and US$34.8 billion respectively. For our analysis we have used US$36.0 billion in 2009, US$35.0 billion in 2010 and US$40.0 billion in 2011.
- Profitability: We have used an EBITDA margin of 28.0% in 2009 dropping to 26.5% in 2010 then rising back to 28% in 2011. Reuters has $CSCO‘s EBITD margin at 27.1% last year and an average of 30.6% over the last five-years.
- Capital Expenditure: We have assumed capital expenditures of US$1.15 billion in 2009, US$1.05 billion in 2010 then US$1.35 billion per annum moving forward.
- Discount Rate: 10.5%.
- Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 14.3% – we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.
Our analysis incorporates the cash and debt on the $CSCO balance sheet – Valuecruncher calculates a net debt number.
Play with our assumptions – what does your analysis say? Our model is interactive – you can change any of our assumptions.