Cash flow is commonly defined as earnings before interest depreciation and taxes and amortization (ebitda) Most finance classes will teach you that the most informative part of a financial statement is the statement of changes,aka state of sources and uses..... found after the income statement and balance sheet- this discloses not only cash flow, but where it is applied. It will also show financing activity, equity and debt, and increases and decreases in working capital. This when read in conjunction with the notes to the financial statements, explains how cash is utilized in a company. Note in statement of changes, tne first item is income (loss) net of taxes and then it adds back non cash expenses such as depreciation and amotization and in prsts case -- the expense related to options excercised -- which dilute eps, but doesn't consume cash. Cash flow is critical, because ultimately it is the blood of the company. Earnings alone can be misleading, especially in high tech, because of potentially heavy required capital expenditures--eg prst which has committed over 10 mm for plate equipment and plant. Grahm and other value investors look to free cash flow - earnings less necessary capital expendiures, on a discounted basis for value.
A companys cash flow is limited by two basic factors - sales and expenses. For example, and simplistically, a company with 100mm of revenues, 50 mm of costs of goods sold and 30mm of expenses, has20 mm of cash flow. If margins deteriorate, say due to competition or material costs, to say 30 per cent, than the cash flow for this 100 mm in sales company goes to 0 ( 100 - 70 cgs - 30 operating expenses) Thus any decrease margins can have a dramatic impact on profits and cash flow.
That is why many on this thread rightly raise the issue of competition. If the price of a plate is $9 and cost is 4.5 it has a 50 percent margin or contribution to pay expense and make earnings. If competition were to drive the price down to say7.20 ( a 20% ) recduction in price its margins would decrease to 37 %. Note however that sales if the same on a unit basis would also decrease 20%. Thus on a cash flow basis for this hypothetical, sales would have to increase 66% to maintain sales. Presstek reported product sales of 16.3 mm and 10.6 mm if costs in its latest Q or 35 % margins (excluding royalties) A 10% decrease in price of theses units (assuming incorrectly that they are all plate sales) would require a unit volumn increase of 40 % in units and 26% in revenues.
As competition is certain, note the agfa settlement did not prevent agfa from making plates, margins will decrease, even though volumn may increase as the press sales increase. The larger the market the more likely the competition. As margins decrease,if sales cannot grow fast enough to keep up with eroding margins, does cash flow and ultimately stock valuation, will adjust downward.
For the record, Presstek is selling at 15 times sales - not earnings. It is my belief, for what its worth, that a company with 80mm of sales cannot be worth 1.2bln. If standaized cash flow valuations are applied, a 1.2 blln market cap would require earning at a 15x of 80mm.
for Prsr to earn 80mm assuming existing margins and reasonable operating expenses including r and d, it would probably requires sales north of 500mm.and then it would be fairly valued. If there is any competition and margins contract by 10% than the required sales would have to exceed 650mm. not likely.
Its late, I hope this helps answer your question.
For the record I am short PRST and value it at best in the low 20s. |
