Malcolm,
I wonder whether anyone bothered to quantify the impact of stock options exercise on Seibel Systems free cash flow after the Fortune article and John Shannon's Cisco post last week. Well I did, and the results are eye popping. Anyone who thinks the options game played by SEBL and many other companies is not a serious issue to consider when valuing investments should look at the positive, but unsustainable, impact that exercise options has had on SEBL's cash flow. It looks to me like SEBL's most profitable business is its stock options business.
(Note: Free cash flow for my examples below was adjusted to arrive at adjusted free cash flow by subtracting tax benefit from exercise of stock options and compensation related to stock options from the normal free cash flow calculation. Both of these items appear in the net cash provided by operating activities results in the 10K and 10Q cash flow statements.)
In the most recent quarter, 91% of SEBL's free cash flow was options exercise related, in year 2000, 71% of SEBL's free cash flow was option exercise related, and in year 1999, 211% of SEBL's free cash flow was options exercise related. In year 1999, SEBL's adjusted free cash flow per share is a negative 10 cents per share. In year 2000, SEBL made 15 cents per share of adjusted free cash flow, up less than 100% from two years earlier in 1998. Yes, I know, tornadoes are revenue based, but still…. In the most recent quarter, SEBL made 1.8 cents per share of adjusted free cash flow. Run this out four quarters and you get 7 cents per share adjusted free cash flow run rate for the year. Purchase this 7 cents adjusted FCF run rate at $40 per share and you get a whopping 571 price to adjusted free cash flow ratio.
Pirah stated in his post to Gdichaz, at some point, a winner, a gorilla, a king, whatever the company or label, must make lots of money from operations. But SEBL is a long ways from justifying its stock price from the cash it is producing from operations. If one applies the Warren Buffet test of whether a private investor would purchase the entire company at this $40 per share price in exchange for potential owner cash flows, SEBL doesn't appear to pass the test. I took the 15 cents per share SEBL earned in adjusted free cash flow for year 2000 and made the extremely unlikely and liberal assumption that SEBL's adjusted free cash flow will double every year for the next eight years. I then discounted these yearly cash flows back at a 10% discount rate. Well, lo and behold, at a $40 per share investment price today, the free cash flows still did not hit a positive net present value (NPV) even after eight years with adjusted positive free cash flows doubling every year. Or to put it another way, the discounted present value (PV) of the adjusted positive free cash flows doubling every year for eight years, using a 10% discount rate, is $39.74. (Note: The discount rate that precisely equates all cash flows to a 0 NPV, or the positive cash flows to a $40 present value is 10.12%.)
With this piece of knowledge, albeit limited, I am seriously considering selling my remaining stake in SEBL in the near future and waiting for a more attractive price to buy back in. Problem is, the more attractive buy-in-price may never arrive, but in the meantime I think I will sleep better at night if I sell the darn thing. It offends me that so much of this company's free cash flow is related to stock options exercise.
Of course this is not a recommendation to others to sell SEBL; it is more about my personal comfort level. SEBL may well lead the NAZ back up when the economy turns around and with all the new business SEBL is winning, cash flow from operations may seriously ramp up going forward. SEBL acts like a stock chomping at the bit to run on the slightest piece of "good" news. Combining SEBL's potential cash flow from new business, the possibility of a continuation of cash flow from the options game, and SEBL's popularity as an up and comer on the TALC, SEBL could be a winning investment even starting at this high price level. Nevertheless, I am not comfortable betting very much on this scenario at this price level that is seemingly already so far removed from real, underlying economic value.
JMHO, Huey |
