If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I bought 400 shares of MSFT at $27.36 on Feb 10, 2011 and 600 shares of CSCO at $18.92 next day. I paid $7.95 for each transaction. Both were darlings of the Internet bubble era and are falling angles now no one likes.
Let me talk about MSFT first. It surprised me that it always falls on good news. For the second quarter, it increased its revenue, operating income and EPS by 15%, 20% and 28% comparing to the same quarter last year. On the date of earning release, it dropped. On Feb 10, 2011, it announced that one of the dominant cellphone handset producers which owns about 29% of the world market, would use its smart-phone operating system going forward. It fell harder.
Using the number presented by Tilson fund, it has $3.68 net cash per share sitting on its balance sheet. It reduces outstanding share count by 8% a year. And stripping off its net cash, it is trading for 10.1x trailing 12 month earning and 9.3x forward 12 month earning. And over the last five years, its revenue grew from $44B in 2006 to $62B and its cash dividend grew from $.35 per share per year to $.52 per share per year. That is 9% and 11% spanning over the deepest recession my generation ever experienced.
It is not as sexy as Apple but it is growing with a healthy net margin indicating a strong moat. Its success in consumer goods shows in Xbox, Kinect and the most recent smart-phone operating system customer sign up.
It faces many challenges. But it simply dominates in most markets it chooses to compete. It may not compete well with Google on search. But search is only a tiny slice of its revenue and profit anyway. It has the treasured AAA balance sheet and it has massive resources to compete in the market it’s chosen. And it takes advantage of this by issuing debt at ultra low interest rate environments. I will add to my holdings if it drops another 15% to 20%.
CSCO has a smaller market cap, thinner margin and more debt on its balance sheet. It has similar amount of cash and investments on its balance sheet. Apparently it faces more competition, is less profitable than MSFT, and doesn’t pay a cash dividend which is supposed to change in the near future.
It has $4.37 net cash and stripping off its net cash from its current share price $18.92, it sells for 11.02x trailing 12 month EPS and 9.83x forward EPS. It has 70% overall Ethernet switching market and more than 50% share of overall routing market. However, it is not as dominate as MSFT is in the software market.
CSCO met consensus on its revenue while missed on margin in its recent earning release. The market is unforgiving by pushing down its share price by more than 15%. And over the last five years, its revenue grew from $28B in 2006 to $40B and its EPS grew from $.91 per share per year to $1.33 per share per year. That is 10% and 9% spanning over the deepest recession my generation ever experienced. It reduces 1.7% share count annually since 2006. Most analysts believe in a 10% top line growth going forward. I will add to my position if the price drops another 20% to 25%.