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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: sun-tzu who wrote (146643)	1/28/2002 10:05:23 PM
From: reaper	Read Replies (2) \| Respond to of 436258

<<of course, equities don't always trade based on fundamentals >> exactly, sometimes they trade at prices LOWER than fundamentals would dictate <ng> since you were buying AOL/TWX in your IRA, I assumed you were interested in a fundamental valuation. for a look at how the market may view the fundamentals of AOL/TWX in time: Merck (MRK) has a $130 billion equity market cap (so about the same as AOL/TWX). Cash from operations this year will be +/- $8 billion; free cash will be +/- $5 billion. So 2x free cash generation of AOL/TWX. Now, I understand that Merck has some drugs coming off patent, but they spend about $2 billion a year on R&D; my bet is that R&D will yield substantial future profits; likely more profits than any $2 billion AOL/TWX could spend. And I won't even get into the high leverage at AOL/TWX. Bristol-Myers (BMY) has an equity market cap of +/- $90 billion (so somewhere in the area of my target for AOL/TWX). They will do in excess of $4.5 billion in cash from operations this year, with $3.5 billion in free cash. Again, problems with drugs coming off patents, not to mention the ImClone fiasco, but spending $2 billion a year on R&D to find new drugs. Again, far superior balance sheet to AOL/TWX. I could go through similar stats for the other major drugs, but I will spare you. <g> These stocks were all accorded "premium" valuations for one reason or another in the not-too-distant past. Now, things have changed and they are valued based on the long-term cash generation and franchise value of the businesses. In the long run, the stock market is a weighing machine, not a voting machine. I am again coming off as preachy as I re-read this, and I am sorry for that. Don't mean to be. Cheers