Value Expectations lets our clients harness the Economic Margin Framework, and solve for the performance a company must deliver to justify its current price. For example, Value Expectations for Cisco in 1995 revealed that Cisco was really more of a value stock, in spite of a P/E greater than 50. At that time, the expectations priced into Cisco’s stock were very modest. The table below shows Cisco actual value driver performance prior to 1995, the expectations priced into Cisco’s stock at the start of 1995, and what Cisco subsequently delivered.
LOW Expectatoins
Table 1: Value Expectations Priced into Cisco 12/94
Value Expectations indicated that despite a 50+ P/E Cisco was relatively cheap. Huge potential rewards were available to those that took the time to think through the analysis.
By significantly exceeding the expectations priced into its stock, Cisco delivered extraordinary returns to its owners (68% annualized total shareholder return in excess of the S&P 500 from 95-99).
HIGH Expectatoins
Table 2: Value Expectations priced into stock (00)
By July 2000, Cisco was priced to deliver extraordinary future levels of growth and profitability. Over the subsequent year, it failed to achieve those expectations.
By significantly falling short of these market expectations, Cisco has returned an annualized return 62% lower than the S&P 500 since July of 2000.
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