In this paper I want you to suggest that a reader either buy, or sell, shares of Cisco Systems (CSCO), which makes key pieces of internet hardware.
To support your conclusion, I would like you to value CSCO shares using the 3 methods I outlined in class:
- Discounting the dividends.
- Discounting the cash flows.
- Using ratios to compare it to its peers.
You will submit a paper and an associated spreadsheet.
Resources:
Use the “311 Sp 2022 DCF and Divs” worksheet on Laulima as a framework for coming up with your valuations for CSCO. Use Yahoo Finance or another finance site for basic numbers to input. Use the textbook as a reference.
Be aware of my basic color-coding scheme in the spreadsheets:
- Light blue are cells needing inputs.
- Yellow cells are calculated, if you wish to change the value in these cells, see if you can find a light blue cell to change to get your desired result. Or, change a cell to light blue if you wish to hard key an input into it.
Output and structure:
The paper should be about 2-3 pages long, with 5 main paragraphs. The writing should be in full sentences, but need not be fancy.
Paragraph 1) Your overall conclusion. What price do you think CSCO stock is worth today? Given that price tell me if I should buy or sell the stock. Your 3 valuation approaches may give very different price conclusions. Tell me how you settled on the price you think the stock is worth. (Average? Preference of one method over another?)
Paragraph 2) Explain the inputs that you used to come up with a discount rate based on the CAPM. You can simply use the current beta and 10-year rates, or you can adjust them if you wish. Just explain why you adjusted. (For example, if you adjusted the beta you might say “I expect the beta will come down more as the company’s business becomes ever more slower growing.”)
Paragraph 3) The value you come up with discounting the dividends. Use one growth rate for the next 5-years growth, followed by the Gordon Growth Equation for the terminal value. The spreadsheet should handle this for you pretty well. Make sure you understand it.
Paragraph 4) The value you come up with using the DCF model. Plug the key numbers into the spreadsheet available on Laulima, then decide if you want to fiddle a little bit with them.
Paragraph 5) Find 3 ‘peer’ companies, create a table with their P/E, PEG, and EV/EBITDA ratios. For each ratio, find an average for CSCO’s peers. Compare them to CSCO’s ratio in order to support your idea of either buying or selling CSCO. You can be biased! If you want to suggest CSCO is a buy, find 3 similar companies that are much more expensive. If you are going to say sell, find 3 similar companies that are much cheaper. Then argue that CSCO shares should move towards these average ratios, or explain why that logic is faulty (e.g. “All tech stocks are overpriced, so even though CSCO appears cheap compared to its peers, the sector itself is vulnerable.”)
15:
- As I receive your papers I will send you a notice that I received it.
- Late papers:
- All late papers will be graded down ½ step (e.g. a “B” becomes a “B-“)
- After that I will take grades down by one full letter if I am done grading the other exams and yours has not come in.
- I will take your grade down an additional letter each day when your exam is not in and I am prepared to grade it.
Advice on Price Targets:
On Wall Street, most often, analysts come up with valuation targets that are + or – 25% of where the stock trades. So, you will want to adjust your numbers or choose your approach to get a result in that range. In other words, feel free to fiddle with the numbers a bit (especially the growth rates, and the inputs into the CAPM) to move things closer to your target range and recommendation. As you write the piece, be sure to justify your numbers, especially where you decide to deviate from Yahoo. A high-scoring paper will be convincing in its recommendation and will offer good reasons for the numbers it uses.
Advice on What Will Get a High Grade:
- A consistent and persuasive argument. All of your valuation work should support either your buy or sell conclusion.
- Clear and easy-to-follow connections between your writing and the Excel sheets. You may even wish to identify cells, e.g. “As you can see in cell D15…” Writing that combines with spreadsheets or graphs is a crucial workplace skill.
