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Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: VALUESPEC who wrote (9)	10/26/1997 7:40:00 PM
From: Andrew	Read Replies (2) \| Respond to of 253

Hi Valuespec, glad you joined the conversation! Thanks for the tip on O'Neil's book. I'll add it to my shopping list. "I found it interesting the when I looked at some of the stocks you bought in late (?) 1996 have still not performed very well (EK, MCD, COHR)." I feel I need to clarify that I said I am considering MCD and EK as prospects - I haven't bought into those two (yet). I am actually almost ready to pull the trigger on MCD though. As for COHR, I would agree that the stock has not gone up since Dec. 96 when I bought it. However, the company has continued to perform excellently - rising margins, return on equity and free cash flow. That's what's important to me. If they keep it up, the stock price will follow in time. I feel like I paid a bargain price for their prospects - and I want to increase my position. I see it as even more of a bargain now than a year ago. EK has obviously stalled on it's impressive turn around that Fisher orchestrated over the past few years. I have a lot of respect for his ability, but I have enough worries about their business that even today's cheap price is not enticing me enough. Now for MCD. I've been doing a lot of thinking about this one for some time. I'm pretty much down to deciding between starting up a position in it or adding to my COHR position. INTC is also looking tempting, but I would like to diversify more out of the computer/networking industry for this next move. You mentioned that you see MCD having an inferior product and inferior management. Personally, a quarter pounder with cheese is tough to beat in my book, but I'm probably just weird. As for the Arch Deluxe, it sounds like it was a resounding flop. And I think they actually dumped the ad agency that produced those dubious ads in favor of that old agency you were refering to. I just don't think people want to go to MCD for "adult" food. MCD's is like a guilty pleasure, so why pretend it's not? And I don't think their production model is well suited for "fresh" stuff - I think it kind of backfired. MCD's is all about consistency. Anywhere you go in the world, you can trust MCD's to have affordable food that tastes like you expect it to, is delivered quickly, in a clean environment. And families know their kids will love it. MCD's is like Coke. Just as Coke is not fine wine, MCD's is not fine cuisine. But they're both cheap, and they're both everywhere. And I don't think too many hungry or thirsty people will go too far out of their way to avoid either. I agree that MCD could certainly lose market share. But I really believe that the management is not stupid. They run an amazingly saavy and efficient shop. I mean look at their margins. It's painfully obvious that more attention needs to be paid to marketing and franchisee relations in the U.S. I'm pretty skeptical that this operation isn't going to address those issues. I think the recent black eyes will heal. And the recent one-sided media orgy will just help me to buy in at a good price. As for valuation here's my post on the MCD thread: exchange2000.com In short I see their massive cash flow becoming free cash flow in the years ahead, leading to massive stock buybacks, leading to impressive growth in per share earnings to keep Wall Street happy. I think they only need to hold on to their US market share for this to happen. And I think they probably can. We'll certainly find out eventually. Certainly, if I'm wrong about this, all the valuation effort in the world isn't going to help me! "As a "small" investor, you have the opportunity to invest in much better companies which are growing way faster, though cash-flows may not be great since the money may be going back into the business (like MCD). " When it comes right down to it, I think the key issue is growth in free cash flow, which drives shareholder value. Whether that comes from a rapidly growing young company, or a large, slower growing company with rapidly decreasing capital needs - at the end of the day it all just depends on what you pay for the future cash you expect the enterprise to throw off. Because both lead to rapidly growing intrinsic share value. This is just a theory of mine, but it makes a lot of sense to me. I'll check out BNGO... Thanks, Andrew