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

To: jbe who wrote (19)	10/27/1997 10:34:00 AM
From: jbe	Read Replies (1) \| Respond to of 253

Oh my God, I was right -- alas! I just lost over $6,000 on a single stock -- Oxford Health Care (OXHP) -- which fell by 50% today!! I "inherited" this stock from my former investment advisor, from whom I took over my portfolio earlier this year. I kept OXHP because, despite its rather high valuation ratios, it had top growth ratios and good free cashflow. Well, recently it started lagging in its payments (owing, the company said, to "bugs" in a new computer system) and its free cashflow turned sharply negative (owing, again, to the costs of installing the system). I then began toying with the idea of selling it, but put off the decision. Well, I sure was wrong to put off the decision; but I sure was right about that negative free cash flow being the harbinger of worse things to come. Learn from my mistake! Please! (Excuse the hysteria, but I'm bleeding to death.)

To: jbe who wrote (19)	10/27/1997 8:01:00 PM
From: Andrew	Read Replies (1) \| Respond to of 253

Hi all! HOOOOEEEEEEE...what a day. I'm frustrated. Know why? Today just makes it more difficult to pick what I'm going to buy First, Joan, those FCF numbers I gave in post #6 were the most recent year for which results were out (the '96' or '97' indicates the fiscal year they represent). As for the companies you mentioned, I still have to look them up to answer your question about whether I think they're undervalued or not. Hopefully this week. One I will comment on is Intel, which I already have been doing analysis on. So here are valuations on four stocks, all of which went on sale today. This is based on the technique I described in reply#1 to this thread. These are based on estimates of the fiscal year just ended or ending for these companies. Most of the estimates come from value line, but some are my input and hopefully represent fairly closely the results we will see announced over the next few months. (MCD is different and I'll explain my thinking on that one seperately). All numbers in Millions of US dollars *********************************************** Intel (INTC)(est. 1997) Rev: 26000 Net Earnings: 7170 D&A: 2200 Cap. Exp: -4420 FCF: 4950 Conservative valuation assumptions: FCF growth: 10% on average for 10 years, then 5% thereafter Discount rate: 9% Number of shares: 1636 Conservative value per share today: $115 On sale today for: $75 Optimistic valuation assumptions: FCF growth: 15% for 10, then 5% Optimistic value per share today: $170 ***************************************************** Coherent (COHR) (est. 1997) Rev: 391.2 Net Earnings:35.6 D&A: 14 Cap. Exp: -27 FCF: 22.6 Conservative valuation assumptions: FCF growth: 10% on average for 10 years, then 5% thereafter Discount rate: 9% Number of shares: 11.5 Conservative value per share today: $71 On sale today for: $37 Optimistic valuation assumptions: FCF growth: 15% for 10, then 5% Optimistic value per share today: $105 ************************************************ Unitrode (UTR)(est. 1997) Rev: 178 Net Earnings:29.4 D&A: 13 Cap. Exp: -22 FCF: 20.4 Conservative valuation assumptions: FCF growth: 10% on average for 10 years, then 5% thereafter Discount rate: 9% Number of shares: 24 Conservative value per share today: $31 On sale today for: $24 Optimistic valuation assumptions: FCF growth: 15% for 10, then 5% Optimistic value per share today: $45 ******************************************* McDonald's(MCD)(est. 1997) This one is different, because they currently have low FCF, held down by the capital costs of their massive international expansion. As I said before, I see their cash flow freeing up dramatically over the next 10 years, accompanied by massive share buybacks, resulting in rapidly growing FCF per share (despite slow growing overall revenues and earnings) Rev: 11450 Net Earnings: 1660 D&A: 820 Cap. Exp: -1600 FCF: 880 Conservative valuation assumptions: FCF growth: 20% on average for 10 years, then 5% thereafter Discount rate: 9% Number of shares: 685 Conservative value per share today: $101 On sale today for: $44 Optimistic valuation assumptions: FCF growth: 25% for 10, then 5% Optimistic value per share today: $147 ********************************************** Please understand folks that I am not predicting jumps in these stock prices in the near term (ie. next year or two). I have no idea how the market will treat them. I'm just suggesting that buying at these prices would be a very rational decision, PROVIDED that you are very confident that the assumptions hold. If you have a strong belief that these companies have a bright long term future, it looks like you are paying far less than you are getting in real economic terms. The arguments for their prospects are not the subject of this post. That has been well discussed in these companies respective threads. This post just represents the last step: valuation. I don't do this on every company in the stock market. Just the ones I believe in. And it's no coincidence that they all happen to look cheap - there are plenty of others that I'd like to get into that don't look cheap to me. And there are plenty of others that I just haven't had a chance to look at yet. Now I've got to pick one! I wonder if they'll slash prices for me even more tomorrow? Andrew