Joan,
you said:
"And since the working capital number is not a "per
share" number, and since the number of shares out fluctuates from year to year, doesn't this
present a problem (if only a minor one)?"
When I use VL to calculate FCF, I use the raw numbers for net earnings and depreciation that they give, not the "cash flow" per share that they calculate for you. Then I multiply the cap. spending per share by the number of shares they show for that year. They don't give data for the changes in working capital. This seems to me to be getting into far more accounting nitty-gritty than most people would need. It's about changes in balance sheet numbers like accounts receivable, inventory and the like. Things like that I believe will eventually show up on the income statement under "sales", "cost of sales", etc. and will be counted in our analysis that way.
As for "per share" numbers, earnings, D&A and cap. exp. are not fundamentally "per share" numbers either. You just take the total, and divide by the number of shares currently out, and presto chango - per share data. For example, a company that spends $30M on Cap. Exp., and has 60 million shares out, can be said to spend $0.50 per share.
Increasing the share float through options definately dilutes the value of existing shares. Buybacks can help this, but still don't solve the problem, because it essentially means that the company buys it's own shares "high" and sells them to it's option holders "low". Then again it's hard to quantify the increase in future cash flow represented by valuable employees that the company encourages to stay by giving them options.
Issuing stock through aquisitions can be non-dilutive if the company is smart about it. I look at it this way: if after the aquistion and increase in shares, the company is going to have the same or larger FCF per share, it was a good aquistion. Just like buying stocks - you want to pay less than what you're getting. That's why "pooling of interests" (ie. paid for in stock) aquisitions are so attractive to companies with "high" ratios. The higher your stock price, the fewer shares you have to issue - making it more likely that your aquistion will end up non-dilutive, and thus increase the value of your existing shares, rather than decrease it.
This happened a lot in the 60's. Many P/E's were high, so a company could "fake" growth by using it's stock to purchase that of company's with low P/E's. By continuously doing this, their earnings per share would increase impressively, further "justifying" their high P/E. Of course, when the bear strolled into town, this little game went down the toilet. As ratios got crunched, the "conglomerates" could no longer make the attractive purchases as easily. So their growth slowed. And their P/E's fell further. And so on. Then they realized that while they did know a bit about running a military manufacturer, they had no idea about effectively managing a chemical business, let alone selling ladies lingerie. So they often started losing money. That's what Peter Lynch calls "diworsification".
But a smart aquistion in the core business, purchased at a reasonable price, can increase FCF per share even if the number of shares increases.
This is entirely analagous to our attempts to purchase parts of companies for long term capital appreciation. The less we pay for our FCF, the better we will do. I'm trying to put together a portfolio analysis method which measures how much FCF you "own" now - so that further purchases are only considered if their price gives you a chance to improve the "return on equity" of your portfolio. (essentially - only make non-dilutive purchases!) Warren Buffett does this at Berkshire Hathaway.
Andrew |
