Re: Valuation Question
A hectic week just getting around to answering responses. Thanks for the insight Paul. I come up with 15 but I probably made a mistake somewhere. Anyway perhaps you could provide some more insight for me regarding a real world situation. Several on the forum have said CSCO is overvalued as their trailing PE is 39. To me this number is deceptive. Looking at a balance sheet from last qtr for CSCO I see the following entries:
From Current Assets:
Cash And Cash Equivalents $9,484,000,000
Short Term Investments $3,172,000,000
Long Term Investments $9,377,000,000
I haven't read the details regarding CSCO's long term investment portfolio but if they are typical of other tech companies, they consist of debt securities exclusively that are highly liquid. Many of these companies made a lot of money in the late nineties and hoarded the profits and some of the cash found it's way into long term bond investments. I only bring this up because strictly speak the long term investments aren't cash but they tend to have good liquidity. Ok so if I add all of these assets up I come up with a little over $22 billion dollars. IMO the vast majority of these assets are not part of the on going enterprise in that they are not essential in generating future earnings. Ok CSCO will report it's interest income as part of it's earnings so to to get the true picture of earnings generated from the core business you would have to subtract them out. When I look at the market cap for CSCO I come up with aproximately $72 billion. So subtracting out the cash hoarde from the market cap I get a valuation of about $50 billion for the ongoing operations that are used to generate free cash flow. Based on that number the PE for the ongoing operations that generate future free cash flow is (50/72)*39 = 27 which is still high perhaps but is better than 39. There are some more very extreme examples of this in the tech sector
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