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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: jbe who wrote (21458)	5/6/1998 2:42:00 AM
From: Chuzzlewit	Read Replies (2) \| Respond to of 95453

jbe, although ideally we should evaluate companies in terms of the future stream of free cash flows (discounted), in practice we can't do it. Yes, that is exactly what I believe. Nevertheless, we can subjectively evaluate the company's prospects using cash flow as a major focal point in relation to growth. The essence of my approach is this: First, find an industry with excellent long-term prospects (not turn-arounds or value plays) with reasonable prices based on what I conclude to be the prospects for the industry. Second, search out those companies which are financially strong, have solid cash management, and have excellent free cash flow prospects. These companies are my investment candidates. The two cash flows I use are: 1. Operating cash flow, which I define as the cash flow generated from operations. You will frequently see this used interchangeably with EBITDA by some analysts although there can be significant differences; and 2. Free cash flow which is operating cash flow less interest, taxes and provisions for sinking funds. The heavy debt load of many of the drillers is the reason for the disparity between operating cash flow and free cash flow. This characteristic is typical of highly leveraged industries, but the modern paradigm amongst technology companies is to avoid debt. You went on to ask for criteria to use in selecting a potential investment. Given my proclivities I would focus on these two: PEG and Price to Cash Flow. Finally, you asked about the price to sales ratio. I find this ratio so far removed from what I consider to be important that I never use it. If we agree that the key company fundamental that drives its stock price is the expectation of future cash flows, then we ought to conclude that any measure that doesn't capture at least a portion of that factor isn't going to be very useful. As I am fond of pointing out, supermarkets have very high inventory turnover and low profit margins. Jewelry stores have low inventory turnover and high profit margins. If each kind of store generates the identical cash flows and has identical growth prospects why would you favor a supermarket over a jewelry store? You seem to ask these meaty questions that require a great deal of thought. Unfortunately, I don't seem to get to answer them until just before bedtime, so I'm as coherent as I should be. For that reason I'll pass on chaos theory for awhile. TTFN, CTC