Last week Cisco (CSCO) announced their quarter 4 results. The response was pretty positive but analysts were concerned about a lack of guidance from the data-networking equipment and software giant.

At Valuecruncher we decided to put some numbers around the potential future performance of CSCO using our on-line valuation tool.

CSCO Valuation

CSCO grew revenues from US$22.0 billion in 2004 to US$39.5 billion in 2008 – a 15.7% compound annual growth rate. Our assumptions of revenues for the next three years are US$43.5 billion in 2009 growing to US$52.5 billion in 2011 – a 10% compound annual growth rate. We have projected EBITDA margins to grow from 29.0% in 2009 to 30.0% in 2011. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 10% dropping to a 4.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$1.25 billion. We have used a WACC (discount rate) of 10.5%.

The key assumptions as we see them are:

CSCO Revenues for the next three years. We believe that 10% per annum growth is a reasonable estimate to start with.

CSCO EBITDA margins. We are comfortable with a slight rise. 2011 EBITDA margins in the 29-31% range appear reasonable.

CSCO WACC. We view CSCO’s WACC in the 10-11% range. We took a mid-point.

Valuecruncher valuation model of CSCO with interactive assumptions

Our analysis incorporates the cash and debt on the CSCO balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$28.51 per share which is 19% above the current share price of US$23.93.

Based on our analysis the current share price looks cheap. Play with our assumptions – what does your analysis say?

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