From: Linda (email@example.com)
Date: Fri Sep 15 2000 - 21:37:38 PDT
Cisco's current market cap is an incredible 440 billion. Although a
richly valued stock can become even more richly valued, in the long
term one wonders just how much room for growth this stock affords.
In May, Barron's published an article on Cisco which caused the stock
to tank when it was trading at around 67 (current price is 63 3/4).
There were some good points on Cisco's valuation:
The company's P/E alone should give investors pause, even though
analysts strain to justify it. No established company has ever traded
at such a high multiple and failed to come a cropper in the end --
especialy not an established company with such predictable earnings.
If Cisco sold at the multiples of its competitors, investors would be
shocked. If the market valued $1 of Cisco's earnings the way it values
$1 of Nortel's earnings, at a multiple of 100, Cisco stock would be
selling for $35 a share. If it could command Lucent's multiple of 46,
Cisco's share price would be around $16.
How much does a company have to earn over the next 10 years to warrant
a multiple of 190? By the old-fashioned one-to-one rule of thumb,
matching the growth rate with the P/E ratio, earnings would have to
grow 190% a year.
Even bullish analysts do not believe that Cisco's profits will even
double from fiscal 1999's $2.5 billion, much less that they will do
so every year for more than a decade. If they did, the analysts would
have to believe that Cisco's existing businesses will produce profits
of $2.5 trillion in 2010. If they believe that, then they should
consider selling every other company in their portfolios, because a
company that earns $2.5 trillion in 2010 will have taken over half
the world. Of course, a company that successful will probably sport
a P/E ratio way above a mere 190 times earnings, and it will be able
to take over half the world for stock.
Another question worth asking produces a different answer: If a
hypothetical long-term investor buying Cisco at 67 3/4 at the end of
last week were seeking what some bullish analysts expect, about 35% a
year in price appreciation, what would the stock be selling at in 2010?
Answer: $1,300 a share. At a multiple of 190 times earnings, Cisco
would be making around $6.80 a share, or about $47 billion. That's
hefty, but a far cry from $2.5 trillion, the kind of earnings the P/E
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