Cisco Systems ($CSCO) has traditionally been a designer, manufacturer and seller of network and communications technology and services.  Two weeks ago the company announced a significant shift in strategy by beginning to compete with Hewlett-Packard ($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 Interactive Analyst Report For $CSCO - New Format

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.

Assumptions

• 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.

Disclosure: None

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?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.