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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (89)	3/17/1998 10:37:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

My Model Shows Stocks at 7%-8% returns. >Does this mean the interest a bond would have to pay to generate the >same income as would the company's earnings as a percentage of the >stock's current share price? Yes. At current prices the present value of the free cash flow should yield between 7%-8%. (this is a long term view) That gives us a 1.2%-2.2% risk premium over 30 year govts. Clearly 7%-8% is much lower than the historical 10%. Then again, inflation and interest rates are lower than average. This all assumes steady PE ratios, interest rates and Return on Equity. If ROE returns to more average levels (above the long term average but lower than now) all bets are off. Returns will be lower and PEs should fall. Similarly, if rates and inflation rise PEs should fall and earnings will decline a little. If both should return to average levels: let's say ROE 15%-16% and inflation to 3%-3.5%, an efficiently priced market would tumble in a major way from here. (IMO)

To: porcupine --''''> who wrote (89)	3/18/1998 5:21:00 PM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

> Given that free cash flow is cash flow minus capital spending, > how can free cash flow exceed cash flow? By some definitions, free cash flow also nets out changes in inventory, receivables, and payables. So, for example, inventory or receivables shrinkage or payables expansion will deflate cash flow, but not free cash flow -- which is why I describe cash earnings as fcf unadjusted for changes in working capital -- as explained in GADR's Methodology: web.idirect.com. I figured everyone would find that part totally borrrrring, but now you see why I had to include it. > Philosophical question(s): should money put into expansion be > considered as cap exp? Definitely. > It certainly does reduce cash available, but > if the company is growing, isn't this a more productive use of the > money than share buybacks? If it's a growing company like Intel or MSFT, maybe it's justified (if the growth keeps up -- a big "if".) If it's a slow grower like GM or IBM, after a prudent reserve is accumulated, the rest should be returned to shareholders. > If by definition expansion does figure > into cap exp, then does fcf give us the best picture of a company? At the end of the day, it tells you how much cash would be left in your pocket if you owned the company outright. For people from, say, Omaha, that's not an unimportant point to ponder. > How does Intel, which spends gobs on new plants, manage to pile up > so > much cash in the bank? 1. It has extraordinary margins for a manufacturer because of: a. market dominance (so far); b. piggybacking on MSFT's growth. 2. It doesn't want to add chipmaking capacity beyond the present level.