I guess I'll repost my second response to the rest of your comments, because the topics are relevent to what we want to do with this thread:
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jbe, now for some comments on some of the other things you said.
"Unitrode has fair --not great -- free cashflow, and it scores very high on other criteria."
I guess I'll agree with you if you mean "relative to the recent stock price". If you mean "relative to Intel or Coca Cola", well, it depends on what you pay for it. On the other hand if you mean that a decrease in earnings or a major increase in capital spending could wipe out the surplus, I guess fair is a reasonable description.
"But I don't have the knowledge or the skill to calculate future (discounted) free cashflow"
The future estimates are indeed tricky, and the less you know about a company, the crazier you'd be to try it. I combine optimism with conservatism when I like a company's prospects. Once you make your estimates, discounting is the easy part.
" (One of my favorites, Miller Herman, belongs to this category.)"
*giggle* Sorry, I have to say it - They're actually called "Herman Miller" - the stock just shows up as Miller (Herman) in some listings. I just had to laugh - it was like you said "Cola Coca". Seriously though, I have one of their (his?) chairs. It's a true godsend for desk jockeys.
"But there is a major problem with all free cashflow measures. And that is that they do not -- and cannot -- reflect which of a company's capital expenditures are necessary to sustain the business (and hence should be deducted from operating cashflow) and those that are not "necessary" (and hence should not be deducted). That's something you can only figure out when you know the company very well."
I violently agree with you on this. Given that most of us have day jobs and can't go jetting off to interview CFO's all the time, how do we solve this problem? I don't even find that 10K's or annual reports dependably contain enough information to figure this one out.
"And should I dump a stock when its free cashflow situation reverses itself radically in a short time (e.g., Oxford Health Care -- OXHP -- which has gone from a very positive free cashflow situation to a very negative one in two short quarters)? "
The short answer is to take a long term perspective. Is this likely a temporary situation, or does it look like a long term trend? I guess this is one of the places where good ol' fashioned human judgement is required - proves it's inadvisable to just let a computer spit out stock picks.
I'm facing a similar problem with McDonald's. I think this company has great international growth ahead of it, and it has tremendous cash flow. But they're expanding so fast that the capital outlays completely cancel out the cash flow. How do you value that? I think the answer is that someday the expansion will slow down, and MCD will start gushing cash in the billions. If you're interested, I posted about this in more detail last night on the MCD threads.
"And what do you think about starting a free cashflow freaks thread?"
That sounds great. We could trade notes on cash-gushing companies and their valuations without clogging up innocent threads like this one.<g>
Do you know how to do it?
Andrew |
