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

To: jbe who wrote (33)	10/28/1997 8:04:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 253

jbe: I won't comment on the debt issues and the qualitative issues, since they aren't central to the issue here. I propose that for now at least we set aside any discussion of the relative merits of any of these companies. What I am perceiving is that these different sources are calculating things differently. And I think this is where we would all benefit from investigating the differences further, in order to understand this. For example, going by the figures I pulled out of VL, and putting them in your terms, I get the following price to projected (1998)FCE ratios: CSCO 32.65 CPQ 18.87 SUNW 13.66 ELY 17.84 DE 14.06 XRX 15.11 KO 34.04 CA 15.36 AMGN 15.11 TLAB 40.91 SGP 28.11 It seems to me that the discrepancies are so distinct across the board that we should try to figure them out. BTW, in S&P Outlook's August "Buffett Screening" they got the following companies (among others); I include the price/1998 projected FCE ratio based on VL numbers for fun: ADBE 17.31 AMGN 15.11 ELY 17.84 CSCO 32.65 DNEX 16.91 EMC 25.53 INTC 26.98 PMTC 23.14 Any ideas? Pirah

To: jbe who wrote (33)	10/28/1997 8:47:00 PM
From: Bill Morel	Read Replies (1) \| Respond to of 253

>>> ... I wanted very much to buy at least one oil drilling company. But in spite of the fact that most of them had good cash flow, virtually all of them had negative FREE cash flow. My inhibitions kept me from buying, until I finally broke down and bought Ensco International (ESV), which at least had positive cash flow (although a very high ratio). I don't regret it, incidentally. I've been lurking a while and just had to respond to this. The thread is great, but there is not much mention of changing fundamentals in whatever industry area we're investing in. The oil drillers, for example, have been in a recession for 15 years so historical data is not really applicable. Using four years of historical data as a basis of prediction is only applicable for companies that can be considered very long term growers in a non-capital-obsolesence industry (e.g. KO) INTC on the otherhand will crash as soon as everyone has a fast enough PC (admittedly a long time off :-) The market discounts future cash flows and that is why the Peter Lynch approach of thinking about fundamentals is essential as well. It seems that "visibility" is also a factor - oil drillers have good visibility presumed at the moment.

To: jbe who wrote (33)	10/28/1997 10:39:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 253

jbe: Just another data point confirming that there are differences in the numbers our sources are using: >get contradictory data on Xerox (XRX). MarketGuide gives it an "NM", >meaning negative free cash flow. Morningstar does not -- but then it >doesn't have data for 1997. Here are the numbers for previous years: >+1090 (1994); -236 (1995); +1,372 (1996). I just checked with the S&P stock reports I have - here are their numbers for those same years: 1013 (1994); 1396 (1995); 1411 (1996) I agree with Andrew that the SEC reports are the most accurate way to go - assuming we can analyze them properly. Pirah