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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Grantcw who wrote (23941)	4/30/2000 9:16:00 PM
From: Pirah Naman	Read Replies (2) \| Respond to of 54805

Chilly Willy: A sizable secondary offering and subsequent dilution is one of the possible unfortunate consequences of negative free cash flow. Here are thoughts on how you might approach the valuation. First, check with the company and see what they intend to do with the money, and how long they expect it to last. If it is a one time event, then you could still calculate their intrinsic value the same way (the expenses are still there), but instead of comparing their intrinsic value to their price, compare it to their price minus the cash they hold. In other words, on a company wide basis, they will actually look somewhat cheaper, because they have already arranged for the money. Bad for previous investors, good for new investors. On the other hand, if they do not see this as a one time event, I would suggest putting your attention elsewhere. The dilution would affect valuation if it affected the growth rate of FCF on a per share basis. But consider that if the company as a whole is assumed to keep growing profits at the same rate, the per share rate will suffer only once. That is, if you expect the company to grow profits at 20% per year, and one year the share count jumps up, that year will show a lower growth on a per share basis. But the next year it would grow 20% again. Since compounding is at stake, you do want to account for this if performing your valuation basis on a per share basis. Since so many young companies expand their share base fairly aggressively, it is often easier to calculate intrinsic value on a company basis, then assume some rate of dilution to estimate a share count at your point of calculating the residual value. - Pirah