Gorilla and King Portfolio candidates - Moderated Message Board

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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated

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To: Uncle Frank who wrote (193)	10/30/2003 4:22:56 PM
From: Mike Buckley	Read Replies (3) of 2955

Frank, What's magic about 10 years of free cash flow? Is that a standard time period for valuation exercises? There's nothing magic about it but I sure do wish there was. :) I think of it as a benchmark of sorts because of it's implicit so-called earnings yield of 10%. (The ratio of one year of cash flow to the enterprise value that is ten times greater = 10%.) If a medium-term bond such as the ten-year bond provides a guaranteed yield of about 4% as has been the case recently, most people would want an earnings yield of atleast 10% to compensate for the much greater risk of owning the stock. It's just my way of trying to put it into perspective. [Edit: Another way of putting it onto perspective is that an investor would be willing to pay a greater multiple for a rapidly growing free cash flow and a lesser multiple for a slower growing free cash flow. Nothing is a constant.] Since it's pricey by valuation standards, have you considered retiring the position? I would consider selling part of the position, but you know the likelihood of me having that much discipline. :) Seriously, I hope I have the discipline in the future not to publicly announce any buy or sell decisions. Since people shouldn't make any decisions based on mine, there is no benefit in knowing those decisions. Also, I've decided to be less open about my thinking in a public forum because there are those that will abuse that openness. Until the 10K is published, my free cash flow data is based on rather old data from the most recent 10Q. I probably won't make a decision until the 10K becomes available. Back to the numbers ... Qualcomm's free cash flow metric that I use grew from a negative $290 million in FY99 to a positive $290 million in FY00. It grew more than 50% in FY01 and more than 50% again in FY02. Trailing free cash flow as of Q3 is more than 50% greater than in FY02. I suspect that if that growth in free cash flow continues for the next several years, the entireprise value will also increase. If that happens, based on my thinking the enterprise value will continue to be priced to perfection. Such perfection can be built into a stock whether the price is rising or lowering. --Mike Buckley

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