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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (42990)	6/12/2011 2:18:23 PM
From: Spekulatius	Read Replies (2) \| Respond to of 78748

Madharry - the GAAP earnings have provisions in place to account for stock options. The problem is that many analysts ignore them (and other expenses) and work with "operating earnings". I do not think that with companies like MSFT,CSCO or INTC, the stock options are the main problem, the dilution due to stock options went down significantly during the last 10 years as these companies matured. I believe that MSFT even uses restricted stock mostly, which is fully expensed. The bigger issue is that the FCF numbers for tech companies are misleading because most of these larger companies don't grow organically (the underlying assumption for most FCF models since they don't subtract the cash spent for acquisitions) and spent very high premiums to buy small growth companies or competitors. So, if you look at the forward growth rates, you need to take into account that a tech company very likely will not just have to invest in equipment (which is accounted for in FCF models) but also in intangibles (via premiums paid in acquisitions) which typically are not. if you take intangibles into account the FCF and ROA will become much less impressive. The other problem with discounted cash flow models is as you pointed out the residual value, which in most models is the largest chunk of the value. The valuation becomes highly depended on the earnings assumption and multiple you put on a stock for the residual value calculation.