I mentioned in monday as one of the many screens I check through. Morningstar used it again today on a note I got: “We think _____ will generate free cash flow at an average of 7% of sales through 2012” I stil think it is a good metric to look at…
Onwer’s earnings as a % of sales IMO.
boom, good call
Looking at FCF punishes firms spending CAPEX for growth opportunities. What you want to look at is distributable cash flow (EBITDA - interest expense - taxes - maintenance capital expenditures). -Warren
EMHdenied Wrote: ------------------------------------------------------- > Looking at FCF punishes firms spending CAPEX for > growth opportunities. What you want to look at is > distributable cash flow (EBITDA - interest expense > - taxes - maintenance capital expenditures). > > -Warren From Berkshire Hathaway 2000 Letter to Shareholders “When Charlie and I read reports, we have no interest in pictures of personnel, plants or products. References to EBITDA make us shudder does management think the tooth fairy pays for capital expenditures? We’re very suspicious of accounting methodology that is vague or unclear, since too often that means management wishes to hide something. And we don’t want to read messages that a public relations department or consultant has turned out. Instead, we expect a company’s CEO to explain in his or her own words what’s happening.”
mpnoonan Wrote: ------------------------------------------------------- > EMHdenied Wrote: > -------------------------------------------------- > ----- > > Looking at FCF punishes firms spending CAPEX > for > > growth opportunities. What you want to look at > is > > distributable cash flow (EBITDA - interest > expense > > - taxes - maintenance capital expenditures). > > > > -Warren > > From Berkshire Hathaway 2000 Letter to > Shareholders > > “When Charlie and I read reports, we have no > interest in pictures of personnel, plants or > products. References to EBITDA make us shudder > does management think the tooth fairy > pays for capital expenditures? We’re very > suspicious of accounting methodology that is vague > or unclear, since too often that means management > wishes to hide something. And we don’t want to > read messages that a public relations department > or consultant has turned out. Instead, we expect > a company’s CEO to explain in his or her own words > what’s happening.” That is why you subtract maintenance CAPEX. One does not become a good analyst by memorizing other great investors such as Buffett, but by understanding the themes behind their statements.
Exactly, it’s all about the cash left over that they can re-invest in themselves to compound growth.
another valuation metric I usea lot, too, is deal comps based on number of users or subscribers. As in if 2 firms have similar size markets and users and margins, I may look at a deal and see how much the bidder paid per customer or user, etc. Then take that and extrapolate it to another target. you gotta be careful with comps, but you’ll be surprised how much more faith the St has in these sometimes than they do in DCF. I try to combine both and hopefully im in the same ballpark price range with both.
i was with you, but you originally mentioned something as “cheap” by this metric. Its just FCF margin, doesnt have a price component to it. Was just trying to point out that whether a stock is at a dollar or a hundred dollars, this ratio wont change. Thats all I was saying. Totally reasonable to like fcf, not questioning that in the least. If you want to augment it a bit, look at fcf/sh over px, and now you now have a real fcf yield.
daj, Two questions for you: How did or do you get access to morning star research reports? I do like the fundamental research that they do for their equity research reports but it would be nice to read one or two of their reports to see the format and the way they acctually do it. You have said in your other post that you do read sell side research reports. How do you have access to these? Is there any way you can send me a few of the morning star and sell side research reports, if you can? It doesn’t matter if the reports are old but it would be nice to read through how they do it. Email is lhamtse@yahoo.com Thanks. thanks.
grover33 Wrote: ------------------------------------------------------- > i was with you, but you originally mentioned > something as “cheap” by this metric. Its just FCF > margin, doesnt have a price component to it. Was > just trying to point out that whether a stock is > at a dollar or a hundred dollars, this ratio wont > change. Thats all I was saying. Totally reasonable > to like fcf, not questioning that in the least. If > you want to augment it a bit, look at fcf/sh over > px, and now you now have a real fcf yield. AGREED. thanks for clarifying and adding to this good thread!
LotusGuy Wrote: ------------------------------------------------------- > daj, > > Two questions for you: > > How did or do you get access to morning star > research reports? I do like the fundamental > research that they do for their equity research > reports but it would be nice to read one or two of > their reports to see the format and the way they > acctually do it. I sent you a few. I pay the 100 or so a year to get it. It is worth it, but they are awful stock pickers, it is more for ramping up on a name when I have 5 minutes to do so type of thing > > You have said in your other post that you do read > sell side research reports. How do you have access > to these? contacts at firms, etc. These I cannot pass around. Since I dont soft dollar/trade with these firms, I shouldnt be getting them to begin with : ) -
No it doesn’t - - Presumably the company’s capex are going to fund positive NPV projects which will increase the operating CF piece of the FCF calculation. EMHdenied Wrote: ------------------------------------------------------- > Looking at FCF punishes firms spending CAPEX for > growth opportunities. What you want to look at is > distributable cash flow (EBITDA - interest expense > - taxes - maintenance capital expenditures). > > -Warren
artvandalay Wrote: ------------------------------------------------------- > No it doesn’t - - Presumably the company’s capex > are going to fund positive NPV projects which will > increase the operating CF piece of the FCF > calculation. > > true, but cap ex does reduce FCF in the near term, right? it is like “no pain, no gain” type of thing. I personally get wary of companies that are in cap ex heavy industries and are NOT investing enough. kodak got crushed by HP b/c HP spent more on cap ex and r/d when it matter a decade or more ago. innovators dilemna type of deal costanza!! http://www.youtube.com/watch?v=hJIQjDtdygA&feature=related
Capex should be >= Depreciate Exp.