Reginald,
I read your first two posts to that thread you started. I agree with your basic premise that accrual earnings are practically meaningless, and that companies who chose to maximize these vs. R&D and marketing investments are doing their shareholders a disservice. To clarify in this light, in my last post, when I said that R&D and Marketing are expenses, I simply meant that presumably appropriate outlays for both were already accounted for in the calculation of free cash flow. I did not mean to suggest in any way that they should be minimized.
Here's an example. Where I work, we have a great many projects that we would like to attack, which would definately benefit our shareholders because there is clear market demand for them. However, we cannot tackle all of these projects, so we try to pick the most promising ones. The problem is not lack of money - this company generates a very substantial cash flow - the problem is lack of people. A company with a finite number of employees can only create a finite number of products, and the cost of those finite efforts usually does not require all of the remaining cash flow of the company. As such, many companies have free cash flow, and are still rapidly growing. As I said before, I think that share repurchases are a very rational allocation of this capital. As for external investments, what company does a CEO understand better than his own? It's much easier for management to determine the return on investment offered by buying their own shares than it is to determine that offered by another company's shares. I'm not saying aquisitions are always bad, but they better offer a substantially higher payoff to compensate for the risk and expense of merging two seperate corporations.
Also, in your very comprehensive valuation model, why do you include common ratios such as P/S and P/E when you say yourself they're basically useless? Sure, that'll make your model more palatable to the masses, but why weaken the effectiveness of and add unnecessary complication to it? Remember, you suggested that companies should not give sell-side analysts what they want (accrual earnings), they should give true value. But you're falling into the same trap! Have the courage of your convictions!
Regards,
Andrew |
