Richard / Multiples
First to agree 8Xs is near the high end and I probably wouldn't be a buyer at that point. "Buy them at 4 or less and Sell when pushing 10." Heard that somewhere. I don't think 6 - 8 Xs C/F abnormal. On the other hand one needs to look at projected Cash Flow rather than trailing. It maybe 8 today and 4 tomorrow.
Yes, I did see your work in the Oil and Gas Thread concerning Revenues and Cash Flow.
Message 12039326
Thought it was rather ambitious, but now that you have picked on one of my companies, I've had to take notice.
I have a company here with trailing P/CF of 5x and trading at a projected C/F of 2.3x, Debt to C/F of 1.5 and gets light oil out of the ground at less than 5 bucks per barrel. All that looks real good to me, yet Richard has some questions. Hummmm.
Well Richard, I appreciate the all work and concerns, but I figure it is all horse pucky. Don't get me wrong. I believe you mean well and the figures may have some value, they are not something I'll probably use, however, and here's why.
Cash flow is normally defined as earnings before interest, taxes, depreciation and amortization (EBITDA). (For those who wish to learn more
fool.com )
Because Expenses are deducted from Revenues to derive at Cash Flow, you seem to be suggesting that companies that aren't showing a Cash Flow/Revenue of better than 50% need to be looked at more closely as they should be more efficient. I would take the opposite view and question companies that show higher than average returns. It would seem to me that a company needs to spend money on maintaining and increasing production. Companies that are not spending money on increasing production will show a higher CF/Rev. than one that is. I know which of those I'd be interested in.
At cost of less than $5.00 per barrel, Upton has the one of the least cost per barrel of light to medium crude in Canada. The company appears to be well managed and efficient. Your ratio would suggest otherwise and, therefore, I suggest flawed.
I might be missing something here so I guess my question to you is, what does a company do to change this CF/Rev ratio? Or What causes the difference?
For me, Oil and Gas stocks live and die by their Cash Flows and Debt levels. Production and its cost affect those directly, along with the market price of the product.
Anyway, thanks for the input. Made me think for a change.
Al
My apologies to the thread for the ramblings. This would probably better posted on the Oil and Gas thread. |
