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Strategies & Market Trends : Good Investment Theses: VALUATIONS w/ FUNDAMENTAL ANALYSIS -- Ignore unavailable to you. Want to Upgrade?

To: ratan lal who wrote (154)	7/16/1999 11:10:00 PM
From: straight life	Respond to of 160

Interesting? multexinvestor.com

To: ratan lal who wrote (154)	7/19/1999 2:37:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 160

I thought long and hard about your question before daring to start to answer <VBG>, but let me have at least a starting crack at it. In general terms valuation can be approached in two ways: the break-up value of a company, and the on-going enterprise vale. Each approach is fraught with problems. The break-up value of a firm is basically the market value of its assets less the liabilities. Unfortunately, the market value of the assets are very difficult to estimate. For example, a company with a considerable amount of land purchased some time ago usually has the asset significantly understated on the balance sheet. Similarly, depreciation schedules rarely match market conditions, and in the case of computers and other technology gear, the values may be significantly overstated. Finally, the market value of such accounts as receivables may be subject to considerable adjustment based pn the quality of the individual accounts, and the estimated time it will take to collect those accounts. Beyond the perils of estimating the break-up value of the company there is the very real question of whether that value is meaningful. Companies break-up only when there is little point in continuing on in business, so even if you arrived at a reasonably good value, it is of little use for the on-going concern. This is a long-winded way of saying that book value is of little practical use to the investor. I think the best general approach for an on-going firm is to estimate the discounted value of future free cash flow. Free cash flow is the cash flow from operations less the cash required for capital expenditures. But here, too, there is a problem. If you look at some of the e-commerce companies (AMZN comes to mind), you find that there is little or no (and sometimes negative) operating cash flow. And all prognostications of future profitability aside, how do you you estimate that number? Until I see some concrete display of positive gross margins, I think it is pointless to use this approach. There are many analysts who value these companies on the basis of customers ("eye-balls") and growth of the customer base. But until I can see some connection between sales and cash flow I think it is an exercise in futility to try to value these companies. One final point: Amazon.com is able to maintain close to a zero operating cash flow only by virtue of the fact that sales are growing and that there is a major timing difference between cash in from customers (sales are all on a cash basis), and the cash it pays out to suppliers (which is typically around 60 days). So, in a very real sense it looks like a Ponzi scheme, where accounts payable due suppliers and the sale of stock (to employees via stock options) are keeping the company afloat. If you are interested, I will be happy to supply you with information on how I arrive at relative valuations for companies with earnings. TTFN, CTC