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

To: Reginald Middleton who wrote (61)	10/30/1997 8:19:00 PM
From: Andrew	Read Replies (1) \| Respond to of 253

Reginald, thanks for the Value Line info...I'll check it out. However, I must vigorously disagree with your dim view of stock buybacks. If they have cash above and beyond all well-planned capital investments required for optimum growth in their existing business, it is entirely appropriate to use existing cash to increase shareholder value in other ways. They could make aquistions, pay higher dividends or buyback shares. I think buying back shares points out to the astute investor that the company views its stock as undervalued relative to expected future growth. At the same time it accelerates per share growth by concentrating (vs. diluting) it ownership. This is a more tax-efficient method of rewarding long-term shareholders than dividends. Buying back expensive stock, of course, does not have these benefits. Your thesis assumes that either a) no company has free cash flow at all, or b) the only productive use of free cash flow is through aquisitions. Sensibly-priced aquistions large enough to consume the free cash flow of IBM are not exactly growing on trees. And if one can be found, they are often difficult to manage cost effectively. Conglomeration is not the only answer! I will read sometime this week that thread you started where you probably provide analysis supporting your thesis. Regards, Andrew

To: Reginald Middleton who wrote (61)	10/30/1997 8:53:00 PM
From: Bill Morel	Read Replies (1) \| Respond to of 253

<Unless a stock buy back action is aimed at fuding a compensation plan, it should be considered a stern warning about MGMT's outlook for future growth. The stock buy back tells the astute investor that mgmt. cannot find an internal/external investment that is forecasted to yield anything higher than its own cost of capital. This is a BIG negative.> So would you say that MSFT's use of $3B to buy back stock as part of its compensation plan (counteracting options) is a good use ? It seems that virtually all MSFT net income ($3.5B) was used to buy back options.

To: Reginald Middleton who wrote (61)	11/2/1997 6:08:00 PM
From: Pancho Villa	Read Replies (2) \| Respond to of 253

re:>>Unless a stock buy back action is aimed at fuding a compensation plan, it should be considered a stern warning about MGMT's outlook for future growth. << Reginald, I like your posts and you are again right on this one. However, I would like to point out two things: 1. Since the earth is finite all companies will eventually reach growth limits. I see nothing wrong with a company eventually reaching limitations on profitable growth as long as slower growth is reflected in the valuation (as should be the case in an efficient market: i.e., about 90% of the ocasions. We, active investors, try to uncover the 10% inefficiently priced stocks). So if there is is free cash flow the best option is probably to buy back stock as argued in 2. 2. Assuming getting rid of some cash is the proper thing to do; as a shareholder, I prefer stock buy backs to dividends due to tax considerations (the buy back reduces the number of slices in the pie, thus increasing the share price. Then, I can always turn around and sell long term shares only paying a capital gains tax). A stock buy back is preferable to the company keeping funds not needed "parked" in cash, or even worst investing it in projects with negative NPV. This been said, what is indeed odd is how often one sees companies buying back stock and then turning around and incurring the fixed expense associated with either borrowing or issuing stock. I guess some nice managers like to pay for the Hermes ties investment bankers wear using stock holders funds. I hate it! Pancho PS: to all you FCF guys in this group, I want to thank you for all the wonderful insights. Just one piece of advice, most investors are weak in the accounting (financial statements) and valuation side. This is not the case with you. My advice to you is to concentrate a little more on the fundamentals (e.g., the growth of the networking induestry we know should be in the order of 30%/year), studying the competition, anticipating growth trends is possibly as important or even more important than studying numbers that reflect mainly past performance.