Do you have a stock screener that can scan for cash flow?
I'm not sure if the free stock tools on the internet include a cash flow parameter. I'll do some hunting. Previous efforts have found the sreening tools limited. For example, if I want to find possible train wrecks, I want to scan for interest coverage ratios projecting the current quarters results forward. My initial efforts at this were frustrating. Probably lack of patience on my end <g>
If cash flow is not determined by some other organization(like in a stock screener), then what do you use for Cash Flow? Do you manipulate the numbers or just use CFO?
I'd probably use EBITDA. It would depend some on what I could find in the way of already built screening tools. I'd examine the propescts generated more closely for aberrations.
I like the concept of Free Cash Flow(FCF) proposes by Heckel which is: Change in cash plus or minus adjustments to Cash from Investments plus or minus adjustments to Cash from Financing activities. The adjustments would back out the non-operational cash flows. For example, money received from issuing stock would be backed out on the theory that this wasn't revenue from normal operations, money used for the retirement of debt or to buy treasury stock would be added back in on the Theory that this was an optional use of cash flow from operating activities and, as such, is part of FCF.
I like this idea. But I'd probably look at this once the available tools had identified a smaller list of targets.
So, anyway, what kind of ratios did you find when you used this formula and what investing conclusions did they lead you to?....And do you see any implications if FCF as described above were used?
I manually performed comparisons on a group of Forest and Paper Product companies. BCC, WLL, WY, MEA, LFB and IP. I left GP out because of the huge pending merger with Fort James. IP was just there for comparison, not a serious candidate because they are a part of an index and subject to passive indexing distortion.
I subtracted current liabilities from current assets to get a number to subract from debt, before adding debt to market cap, so it was slightly different than the scan I proposed.
Co Price Earning/EVA Market valuation
BCC 26 1/2 96.68M/3.37B -> 36.8
WLL 33 327/5236 -> 16
WY 43 769/13175 -> 17
MEA 27 246/4104 -> 16.2
IP 33 1/4 1025/26293 -> 25.65
LFB 13 43.4/1098 -> 25.29
The last number is actually inverted, to make the ratio result approximate a PE. So the number is roughly EVA/earnings. Earnings were the current run rate annualized, a risky assumption in cyclicals.
What I found, using earnings rather than cash flow, was that BCC seemed overvalued compared to it's peers. I presumed this was due to a higher degree of exposure to office products than the others. Even within a single sector, there might be trouble comparing apples and oranges.
WLL seemed to be the best value, with WY taking second. About a week later, WLL gained 25% after WY made a tender offer. WY's offer came in higher than what I though WLL was worth based on this analysis. Apparently such a simplistic way of looking at the companies ignored hidden values that the industry insiders percieved. WLL is still trying to remain indpendent, albeit at a much higher share price than when I did the analysis.
LFB is a micro following and less likely to be a candidate for mutual fund buying. There are other members in the sector that I follow, but these were ommitted during this effort.
I found the concept of using a ratio of EVA and Earnings to provide better quality information than the traditional PE, which ignores debt leverage. Free Cash flow would improve this, as it would turn up companies that are generating substantial cash despite goodwill or other non cash charges. These companies have greater prospects, IMO, if they deploy that cash flow effectively.
In an Ideal World, I'd run both EVA/EBITDA and EVA/Earnings, then study the companies that had the most intriguing results. It's quite likely that this would identify particular groups, say REITs or companies with substantial depletion for EVA/EBITDA, and a different subset for Earnings.
I would expect the results of the proposed FCF/EVA scan to provide very small numbers, ie .012, where the smaller the number the greater the potential value. |
