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

To: jbe who wrote (31)	10/28/1997 5:23:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 253

jbe: Every week VL sends out several different things: 1) Ratings and reviews for the 1700 stocks in the VL index. This is where you can get the projections for cash flow, cap exp, etc. This also includes discussion of the companies. 2) Ratings and Reviews Expanded. This is for 3500 smaller companies, and no forecast or discussion is offered. Just past details. 3) Summary for each of the above (so there are two summaries). This lists every stock's price, P/E, timeliness, and includes a bunch of special screened lists, such as greatest free cash flow generators, lowest price to working capital, stocks with greatest appreciation potential based on their forecasts, etc. 4) VL Selection and Opinions. Discussion of market, a couple of stocks. This is sort of like the S&P Outlook. All of these are available in my local libraries. Now for profit margin. My only reason for commenting on it is that a low profit margin reflects a lack of competitive advantage. One of Buffett's screens is that a company must have a high profit margin, to indicate that the FCFs are likely to be "safe" and thus likely to continue in the future. I do think that using PM as a screen is a bit of a contradiction with the notion that earnings (and ROE, another of his screens) are subject to manipulation, one reason for going to FCF in the first place. Operating earnings would probably be a more appropriate screen, since this is pretty cut and dried (I think). I pay little attention to P/E ratios. My comment that MLHR seems a bit expensive is based purely on the numbers I crunched and gave in my previous post. You are correct, the method I used is based upon the method discussed at GADR. The difference between FCF and the cash earnings used by GADR is simply the change in working capital. I don't think this would be sufficient to explain our divergence on MLHR. I have noticed that S&P gives different figures than VL, so maybe there is more interpretation in determining FCF than we would like. As with all numbers used in valuing companies, I think we should recognize that any precision is a bit illusory. In any event I do not consider a low price/FCF ratio to be indicative of anything other than the rationality of the composite of all participants in the stock market. And of course that it is a good way to gauge a company's capability to generate value. Perhaps it would be interesting to see how much (or little) agreement exists between our methods. Based on my methods and today's closing prices, but without getting into any details of the business, I offer the following, intentionally selected to represent several industries: low (reasonable?)price/FCF AMGN, CA, DE, ELY, SUNW, XRX high (?) price/FCF CSCO, KO, SGP, TLAB If you (and others) ar so inclined, it would be interesting to see whether you get similar results. Pirah