CSCO Analysis

Cisco’s stock has been in a steady decline since the summer of 2010. It’s now available at a very attractive valuation. At a price of $15.14, I find that the market assumes a 7% yearly decline of revenue for the next 5 years, which seems like an unlikely event.

Understanding today’s price
1. Loss of market share in their core business due to competitors launching superior products (high-end market)
2. Cisco’s bureaucratization has lead it away from its customers, giving competitors the opportunity to attack Cisco’s weaker product lines.
3. CEO John Chambers is disliked by many investors as he is considered responsible for a wave of bad investments

Why buy Cisco now ?
1. Successful UCS launch shows that Cisco hasn’t lost its ability to innovate and execute.
2. Cisco’s core market is expected to grow 9% a year for the next 5 years. Therefore, the market’s expectation of a 7% yearly decline of Cisco’s sales is tantamount to a collapse of the company, a clear overreaction.
3. Cisco’s fair value – considering a reasonable loss of market share – is estimated at $23 to $27 per share,
4. Current price of $15.14 discounts Cisco’s failure to maintain its competitive position. If Cisco fails to execute, fair value will be around $13 per share, allowing acquiring the stock at a very interesting risk / reward ratio.

Full report available here : Cisco Report


Main Markets Summary–16 June 2011–Greece (again)

European markets got hammered yesterday, the record drop going to Spain (-4.95%), but an average of –4.10% for the Eurozone. The market is clearly disappointed by the delaying tactics of the ECB, and the lingering disagreements between Germany and France.

Credit markets in general had a very good day, it’s the first time since the beginning of the sell of that we observe a “flight to safety”, with US treasuries up 1.8 %. Junk bonds are still having a hard time, being below the short term moving averages, but are not breaking down.

Best equity markets (further above 200 ma) : Ireland & Switzerland

Most oversold equity sectors : Solar, Shipping. With a PE of 12, the solar sector starts to look cheap, despite the oversupply that is expected until 2012.

US Indexes, Equity Sectors (US & Int.), Commodities Int. Equity Indexes, Real Estate, Bonds
Click for the snapshot
Click for the snapshot

Permanent address for the market snapshot, updated daily around noon Singapore time

Four hints that we are in a minor correction

With QE2 nearing an end, the US economy slowing down, and commodity prices hurting the fragile recovery, the question on every investor’s mind should be “Is the current sell-off a minor correction, or the beginning of something more serious?”

There’s plenty of fundamental information suggesting that equities are attractive, and just as many that shows that the economy is rotten and that stocks could crater. So how about listening to the market to assert the situation?

Read more of this post

Main Markets Summary–7 June 2011 – Bernanke speech shakeout

Summary of the Bernanke speech : The economy is weak, the fed will continue to accommodate, inflation is temporary, no QE3. The confirmation of no QE3 is widely thought to be behind the market sell-off.

In a nutshell

US indexes and all sectors are now under the 50 days moving average except utilities & healthcare. Financials are still the weakest link. Wind & Solar sectors are showing a surprisingly strong performance. Food and industrial commodities registered moderate gains

Europe overall had a pretty good day, with Spain, Sweden as well as Poland and emerging Europe. In emerging Asia, Vietnam had a strong day – might finally be bottoming. Bonds have had a decent but not outstanding day.

Technical Ranks

Top 3: Gold, Poland, Colombia

Bottom 3 : Nickel, Livestock, Cocoa


US Indexes, Equity Sectors (US & Int.), Commodities Int. Equity Indexes, Real Estate, Bonds
Click for the snapshot
Click for the snapshot

Permanent address for the market snapshot, updated daily around noon Singapore time

Main Markets Summary – 03 Jun 2011 – General Sell-off

All main equity markets are now below the short term moving averages. Eurozone is still getting some traction from the bailout, and is showing a good performance.

Tech is still sticking out for its broad underperformance : NASDAQ, the SP Technology and Internet companies are all showing among the worst short term returns.

Read more of this post

NOK, NOK? See you below 5 dollars!

The following two measures give us a hint that Nokia might be cheap and due for a pull-back:

  1. The stock is down almost 40% year-to-date.
  2. The last closing price (6.57$) implies a yearly sales growth of -50% (using a reverse DCF).

It seems a bit extreme, so I decided to analyze the stock a bit deeper. Nokia is still the market leader after all! Unfortunately, a closer look shows that even at this price NOK is still not an attractive stock. Here’s why. 

NOK business is under fire from all sides

On the smartphone front, Nokia is the underdog. Apple leads the pack, then we have Android phones getting traction, and finally "ex-leader" RIM desperately trying to hold its ground. At the bottom, there’s Nokia. Does this part need a longer explanation?  

Nokia’s cheap phones are good products; however local producers are now hurting this part of their business. They create phones that are not necessarily better than Nokia’s, but that are more creative than Nokia’s pretty bland products. In developing Asia mobile phones are often bought to impress, and Nokia’s phones simply lack any "wow" factor. Moreover, mobile phones have become a commodity product, which means low margins and slowing growth.

Recovery hopes unclear

There’s a total lack of visibility about Nokia’s future business. They have a decent chance to stabilize their market share for cheap phones. It won’t be easy, and they’ll certainly continue to bleed market share for some time, but it can be done.

But future growth, especially earnings growth, will come from smartphones. We know that they’re going to use Windows Phone. Ask yourself: does Microsoft have a track record of successful mobile products? There’s the Zune, PDA’s (Windows Mobile) and phones (Windows Phone has 6% market share)… It doesn’t seem like a smart bet, right? 

It appears that Windows Phone 7 is actually a pretty good product. But being a good product is not enough to be successful, and with all the momentum that iOS and Android have accumulated, Windows Phone might not be able to compete. We’ll see the actual Nokia products in October, before that date, gauging their quality is anyone’s guess. However, the market for this type of globalized consumer product is a "winner take all" type of market, which means that third prize is you’re fired. And the third place (or worse) is where Nokia is heading regarding smartphones.  

This lack of visibility also explains why DCF based methods are currently useless to value NOK. Operating and profit margins as well as revenues are all changing too fast to make meaningful forecasts. 

The business in numbers

    • Profit Margin seems to be stabilizing at 5% against a historical median of 10%. It shows the commoditization of the mobile phone business and Nokia’s failure to get into the high margin smartphones. If Nokia continues to stay out of the smartphone market, then this will be their "new normal". It’s clearly not encouraging.
    • All cash flow measures have been going down the drain. Sales conversion into OCF has reached 3% against a historical median of 12%, and OCF conversion into FCF has fell off a cliff.
    • A ROIC of 8% is nothing to boast about, but it’s not bad either. The problem is that it has gone down for the past 4 years. CROIC (Cash ROIC, based on FCF rather than net income) is currently at 3% against a historical median of 26%. Now THAT has to hurt.

    Note: graphs represent past 10 years of data. Bold data is TTM, grey data is the median value.

    The efficiency measures are reaching worrying levels, and they are not stabilizing except PM and ROE. Nokia’s business ability to generate cash is severely challenged, it looks like it’s going to get worse before starting to improve. 

    NOK is NOT cheap considering the uncertainty

    – PE of 9? Hewlett Packard (HPQ) is cheaper, and at least you’d have a stable business.
    – EV/EBITDA of 4.9? That’s the price of a no-growth, utility type of business. Not the price of a "might enjoy negative growth for an unknown time" type of business. However, if you do believe in Nokia’s ability to get a foothold into the lucrative smartphone segment, then it’s an attractive price.


    Note: graphs represent past 10 years of data. Bold data is TTM, grey data is the median value.
    – ROE/PB: 10.4%. It looks good, but as a comparison, Microsoft has a ROE/PB of 10.3% and a competitive position that is still unchallenged; the exact opposite of Nokia. 
    – FCF yield (FCFe/P): 5.7%, around historical averages. So the equity of the business is not really selling at a discount, considering the uncertainty. 
    – Dividend yield: 8%, great but unsustainable, as dividends payments are eating more than twice the FCF.

    Note: graphs represent past 10 years of data. Bold data is TTM, grey data is the median value.

    Despite the price drop, none of the valuation measures give the prospective investor a serious incentive to buy . One would need some pretty convincing information to get into NOK: we have a failing business, with a very uncertain future, that is not selling at a discount commensurate with the risk.

    A final note: NOK could reach the 5$ threshold pretty soon, and that would start a wave of forced selling. 

    All valuation measures available here:

    Disclosure: No position.

    Risk ratios weekly update – June week 1

    I have updated the risk appetite ratios. I’d like to highlight two of them :

    1] Emerging Markets vs USA

    Emerging markets are recovering vs US markets.
    Is it a sign of the “Risk Trade” appetite recovering, or of a slowing US economy ?

    2] Junk Bonds strength

    Still showing strength. US mid to large caps are healthy.
    It’s too early to panic over the reports of a slowing US economy.

    All ratios available here