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Hello all. I'm relatively new at doing valuations so your comments and criticisms are appreciated. Also, I still can't figure out table formatting so I'm going to straight-line my results.

Basically, I hadn't followed CNXS much. I was initially interested but it seemed (I guessed, I didn't really know why) out of my price range. After the recent smack-down I sat down to do the valuation. I bought in a bit at 11.06 to get some skin in the game and will use my valuation, and hopefully your commentary and suggestions, to decide what next steps to take.

METHODS:

1. A discounted cash flow analysis (DCF) using high and low estimates.
2. A 3-year target price based on low-high sales estimates and low-high P/E projections
3. Desired prices based on margin-of-safety discount to averaged value

DISCOUNTED CASH FLOW

Inputs for low estimate:

Cash $42M (includes short-term investments)
TTM FCF $5.3M
Growth Rates Years 1-5 = 10%
Years 6-10 = 6%
Terminal = 3%
Dilution Rate 1%
Discount 11% (Note: I prefer to keep this at the stock-return constant and manipulate growth estimates instead)

Results Intrinsic Value = $9.54 share ($6.46 in present value and $3.08 cash)

Inputs for high estimate:

Cash $42M (includes short-term investments)
TTM FCF $10.8M (this is the SFCF run rate based on last four quarters)
Growth Rates Years 1-5 = 15%
Years 6-10 = 8%
Terminal = 3%
Dilution Rate 0%
Discount 11% (Note: I prefer to keep this at the stock-return constant and manipulate growth estimates instead)

Results Intrinsic Value = $22.38 share ($19.30 in present value and $3.08 cash)

The average of the high and low is $15.96. Applying a further 33% margin of safety, my Buy Zone price is $10.69

THREE-YEAR ESTIMATED VALUE

1. Use the FY2003 sales of $79.1M as the Low Estimate and TTM sales of $85.8M as the High Estimate
2. Use 8% CAGR for Low Estimate and 15% CAGR for High Estimate (three year)
3. Apply projected net profit margin on sales of 9% (slightly less than ttm)
4. Compute Low and High Net Income numbers [8.97 and 11.74]
5. Assume 0% dilution rate (I feel this is fair for the next three years anyway) and EPS = .66 and .86
6. Estimate Low and High P/E based on historical values [13 and 25]
7. Compute target prices based on matrix of PEs and EPSs and we get the following
a. High PE and High EPS = 21.46
b. High PE and Low EPS = 16.39
c. Low PE and High EPS = 11.16
d. Low PE and Low EPS = 8.52
8. Average the low and high figures [14.99] and apply 33% margin of safety

Results: Buy Zone price = $10.04/share.

Regardless of method, CNS Inc. is currently in my buy zone. I'm considering doubling up my initial position. Some other numbers that I'm kicking around are:

+ debt = 0
+ Cash King Margin = 12.58%

- Flowie (2003 = 2.76, ttm = 3.68, MRQ = 3.43)

Unlike others, analysts included, I LOVE the idea of NOT launching a new product this year. Focus on what you do well. I like management, but they should do more with BreatheRight, learn how to truly build a dominant brand and THEN launch new stuff.

I feel that my low estimates are very conservative and that my highs aren't beyond reach. My highest used growth rate is still below the analyst estimates. Anyway, please comment. I'm trying to learn here. :)

All the best,

Blitzen94
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