Cocs Dcf

The valuation of Cisco Systems Inc. (CSCO)

Cisco (CSCO) designs, manufactures and sells internet protocol based networking products for the communications and IT industry. Its conducts business around the world and has a market capitalization of approximately $110 billion. The stock is up 19% over the last year compared to the 10% returns of the Nasdaq index. After using the DCF valuation and get the 8.2x of EBITA and 11x of EPS, I think the price of this stock should be $24.31, compare to the current price $20, it is attractive and worth to long and hold.

Growth Rates

CSCO grew its earnings at an annual rate of 4.3% during the last 5 years. The net income did reduce by 16% during the last fiscal year. The revenue was, however, up 8% year over year. I think relatively stable to improving gross margin and improving operating margin is more likely in the near-term , because Cisco drives further incremental improvement in its switching and routing margins and gains the benefits of its recent staff reduction.

Cisco’s growth should benefit from Cisco’s “low-bar” guidance reset; an improved product portfolio, improving competitive position and improving gross margin in its key enterprise switching and carrier routing markets; on-going gains in the UCS and Telepresence product markets; and follow-on to the initial growth rebound in Cisco’s security business.

Cisco has averaged a return on equity of 20% over the last 5 years. The ROE declined during the past 12-months, because the company's policy of buying back stock as a way to reward the shareholders. Based on above, I assume the long-term stable growth rate of 4.5% is obtained.

Margins and Profitability

Cisco appears to have stabilized its gross and operating margins. CSCO's gross margins have decreased over the last 2 years from 65% 63%. The operating margins were steadily increased marginally from 30% to 31%. The net margins were also lower, decreasing from 17% to 15.6% over the last 3 years.

The primary...