Update on CSCO

CSCO was the first stock I valued on this blog. I came up with a $30-$35 valuation band.

At one point in time CSCO was my largest holding. Today, it is a 4.5% position. It’s stock price fell nearly 10% recently, and I thought I’d value it again in light of these developments. Unlike the previous valuation, I also capitalized R&D expenditures this time around.

Here are the assumptions I made in my valuation. I used a 10-year explicit forecast, based on the notion that CSCO remains a solid, profitable company experiencing some temporary hiccups. I assume operating margins will decline somewhat from 24% currently to 18% in year 10. I also assume that tax reform will happen, reducing CSCO’s tax rate marginally. It will also be able to repatriate its cash hoard – but I assume a 20% hair cut [PS: I have a python program to automate DCF analysis, which I plan to share on this blog after I clean it up, and apply some make-up.]

I can model some uncertainty in the margins and growth. I come up with the following range of estimates.

figure_1The median is $34. At today’s price of $31 and change, CSCO looks mildly undervalued. There is clearly a lot more upside than downside.

I continue to hold, and opportunistically write (and roll) covered calls.

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