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Cash Flows, Earnings Quality, & Stock Returns
seekingalpha.com/artic...
Cash Flows, Earnings Quality, & Stock Returns
www.istockanalyst.com/...~title_Amazon---Is-~qu...
Cash Flows, Earnings Quality, & Stock Returns
Check out this article- on Amazon's Free Cash Flow and how an GS's analyst put a 20 times multiple on it to justify a valuation.
www.istockanalyst.com/...~title_Amazon---Is-~qu...
RIM Misses Estimates; Palm’s Revenue Also Down
Market Cap of $66bn, a P/E of 43 Valued at almost 10 times sales. 100% growth is over.
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
Is AMZN’s FCF from Short-term Cash held from Customers' Sales December Q, paid to suppliers in the March 2008 Q WORTH $16bn in Market Valuation??? Remember this FCF, as many classify it, is not Net Income.
Goldman put a 20 X 2009 estimated FCF, to try to justify Amazon's valuation of $34bn. (2009?)
Amazon a company that earned $1.5bn in the past 6 years, a 2007 profit of $476ml and a P/E of 60+) How can "FCF" (aside from earnings) most of which is of POOR QUALITY be given such a outrageous valuation (20X).
From the Goldman recommendation-in the article-
"Trading at around 20X 2009E free cash flow, Goldman believes Amazon stock can outperform on rising revenue if margins are only flat; RAPID REVENUE GROWTH ASSISTS FREE CASH FLOW BECAUSE AMAZON USES ITS IMPROVING CATEGORY SHARE TO NEGOTIATE LONGER PAYMENT TO SUPPLIERS in categories such as books..."
"FCF" for 2007 according to their definition (computation 1- in the article) came out to $1.181bn, as compared to (computation 2) the FCF beginning with Net Income , of $496ml a difference of $685ml.
Do you feel it is proper or fair to value this $685ml at $13bn, ($685ml x 20 = $13.7bn?) when it all vanished in the following quarter?
Two methods of computing Amazon's FCF for 2007
1) Cash Flow From Operations...........$... bn.
Less Capital Expenditure..............
Free Cash Flow.....................
2) Net Income...................
Plus Depreciation.............
Less Capital Expenditures.............
Free Cash Flow..................... ml
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
Is AMZN’s FCF from Short-term Cash held from Customers' Sales December Q, paid to suppliers in the March 2008 Q WORTH $16bn in Market Valuation??? Remember this FCF, as many classify it, is not Net Income.
Goldman put a 20 X 2009 estimated FCF, to try to justify Amazon's valuation of $34bn. (2009?)
Amazon a company that earned $1.5bn in the past 6 years, a 2007 profit of $476ml and a P/E of 60+) How can "FCF" (aside from earnings) most of which is of POOR QUALITY be given such a outrageous valuation (20X).
From the Goldman recommendation-in the article-
"Trading at around 20X 2009E free cash flow, Goldman believes Amazon stock can outperform on rising revenue if margins are only flat; RAPID REVENUE GROWTH ASSISTS FREE CASH FLOW BECAUSE AMAZON USES ITS IMPROVING CATEGORY SHARE TO NEGOTIATE LONGER PAYMENT TO SUPPLIERS in categories such as books..."
"FCF" for 2007 according to their definition (computation 1- in the article) came out to $1.181bn, as compared to (computation 2) the FCF beginning with Net Income , of $496ml a difference of $685ml.
Do you feel it is proper or fair to value this $685ml at $13bn, ($685ml x 20 = $13.7bn?) when it all vanished in the following quarter?
Two methods of computing Amazon's FCF for 2007
1) Cash Flow From Operations...........$... bn.
Less Capital Expenditure..............
Free Cash Flow.....................
2) Net Income...................
Plus Depreciation.............
Less Capital Expenditures.............
Free Cash Flow..................... ml
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
Is AMZN’s FCF from Short-term Cash held from Customers' Sales December Q, paid to suppliers in the March 2008 Q worth $16bn in Market Valuation??? Remember this FCF, as many classify it, is not Net Income.
Goldman put a 20 X 2009 estimated FCF, to try to justify Amazon's valuation of $34bn. (2009?)
Amazon a company that earned $1.5bn in the past 6 years, a 2007 profit of $476ml and a P/E of 60+) How can "FCF" (aside from earnings) most of which is of POOR QUALITY be given such a outrageous valuation (20X).
From the Goldman recommendation-in the article-
"Trading at around 20X 2009E free cash flow, Goldman believes Amazon stock can outperform on rising revenue if margins are only flat; RAPID REVENUE GROWTH ASSISTS FREE CASH FLOW BECAUSE AMAZON USES ITS IMPROVING CATEGORY SHARE TO NEGOTIATE LONGER PAYMENT TO SUPPLIERS in categories such as books..."
"FCF" for 2007 according to their definition (computation 1- in the article) came out to $1.181bn, as compared to (computation 2) the FCF beginning with Net Income , of $496ml a difference of $685ml.
Do you feel it is proper or fair to value this $685ml at $13bn, ($685ml x 20 = $13.7bn?) when it all vanished in the following quarter?
Two methods of computing Amazon's FCF for 2007
1) Cash Flow From Operations...........$... bn.
Less Capital Expenditure..............
Free Cash Flow.....................
2) Net Income...................
Plus Depreciation.............
Less Capital Expenditures.............
Free Cash Flow..................... ml
Difference between the formulas ......................... million
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
Using AMZN’s method of computing FCF it appears they had a $393ml reduction in FCF for
the 12 mos ended 3/31/08 compared to 12/31/07.
finance.google.com/fin...
FCF, for the 12 months ending march 31, 2008
Cash from Operating Activities
3/31/08........-645ml
12/31/07.... 1,148
9/30/07.........237
6/30/07..........299
Total.................... 1.039bn
Less Cap Exp....... -251
FCF-12 Mos/End 3/31/08.........$788ml
FCF-12 Mos end 12/31/07........1,181m...
Decrease in FCF...................... $393ml
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
Using AMZN’s method of computing FCF: it appears they had a $393ml reduction in FCF for the 12 mos ended 3/31/08 compared to 12/31/07. It was mostly from the $-366ml difference between
March 31, 08 and 07s, Cash from Operating Activities. (2008) $-645ml - $-279= $-366ml). This was because of the large increase in A/Ps of
$1.2bn 2007/ 2006, with the Short-Term Cash from December Q sales paid to
suppliers in the March Q. (HOW CAN YOU CONSIDER THAT FCF?)
Instead of using fictional companies, why don’t you look at the numbers that Amazon issued in their Statements of Cash Flow. As I said putting billions of $s of valuation on their “FCF” is wrong, meaningless, and I repeat Warren Buffett would not consider the “FCF” from A/P as FCF. The company has little profit and is trying to justify their valuation of $33bn by use of this “FCF”.
finance.google.com/fin...
FCF, for the 12 months ending March 31, 2008
Cash from Operating Activities
3/31/08........-645ml
12/31/07.....1,148
9/30/07..........237
6/30/07..........299
Total....................
Less Cap Exp.......-251
FCF-12 Mos ended 3/31/08.........$788ml
FCF-12 Mos ended12/31/07...... ..1,181ml
Decrease in FCF......................
Above is their method of calculation, beginning with CF from operations.
One analyst projected $1.5bn in FCF for the year, I think he should re-evaluate his projection and thinking.
Amazon: Is 'Free Cash Flow' More Important Than Net Income?
How much market valuation is that FCF worth?
Company makes very little profit, a total of $1.5bn in the past 6 years
P/E 67- very high
Market Valuation $33bn
Their Total Debt has been increasing every year,
FCF seems to be a way to pump up or support the stock price
You said Berkshire recognized the valued that float, he used a more meaningful definition to measure it, as was mentioned in the article.
The way some analysts, Amazon, FCF it can be easily manupulated.
For example in the December quarter, if they obtained better terms on $100ml of A/Ps and delayed payment until January their "FCF" (their definition) would have been $100ml higher, $1.281bn rather than $1.181bn.
Would that add'l $100ml be meaningful? (except for some investment income)?
Adjusted for Labor Force Growth, Today's Jobless Claims Are Below Average
someone posted-
"...As far as statistics showing that employment is steady and that there are fewer claims for unemployment for the months of..... That argument can be shot down through the common observation of people who have exhausted their unemployment claims and still can't find work. The longer a person is unemployed, the longer it takes to find employment; or so that is what they say! The areas of manufacturing, construction, and investment banking are now the "weak" sectors of the economy and are facing more and more lay-off's. .."
Canaccord Analyst: Research In Motion to Hit C$200
At a price of $200/sh the company would be valued at over $110bn.
Sale and Profits for the past 12 months were, $6bn and $1.3bn earning. Currently the stock is priced to more than perfection, with an unknown future.
The numbers are like the bubbles of 2000- currently RIM has a p/e of over 60 and is valued at over 13 times annual sales.
Goldman Analyst Incredibly Bullish on Research In Motion
They were also very bullish on Enron, said Enron “Best of the Best”.
GS has a large holdings in RIMM, at 3/31/08 they owned 8ml shares after dumping 2.7 ml share in the Q.
They seemed to have ignored Valuation and put a $163/ target price on, that would give RIM a Valuation of over $90 billion, a little high for a company with $6bn in sales, slowing growth and a P/E of 60 now.
Will RIM ever be able to justify a $90bn valuation, who know what the future will bring with all of the competition out there?
GOLDMAN SACHS, October 9, 2001 -
Recommended List Large-Cap Growth
Price:US$33.45 Target price: US$48 S&P 500: 1051
United States Enron Corp. (ENE)
Gas & Power Convergence
Still the best of the best. With perceptions far below reality, we see major catalysts in third-quarter results and increased
disclosure in coming months. We strongly reiterate our Recommended List rating and our conviction in high and sustained growth prospects, even though we have cut 2002 EPS to $2.15 and our price target to $48. We expect Enron shares to recover dramatically in the coming months. We view the current period as an extremely rare opportunity to purchase the shares of a company that remains extremely well positioned to grow at a substantial rate and earn strong returns in the still-very-young and evolving energy convergence space.
We strongly reiterate our Recommended List rating on Enron stock. We spoke recently with top management including the CEO, CFO, chief accounting officer, and the head of wholesale services.
We challenged top management on the wide range of investor concerns that have weighed heavily on the shares and believe that the majority of market speculation is groundless, and that which has some truth to it, to be exaggerated.
Misconceptions abound and perceptions are far below reality, in our view We believe that investors have virtually given up on Enron (down 60% year to date) and its prospects based on the long list of extremely negative stories about the company and its financial condition.
The company's limited transparency on its sources of earnings, its cash flow, and financials in general has hurt investor perceptions as management has declined to be more specific in refuting outrageous claims that have assumed a life of their own.
We believe Enron's fundamentals are still strong despite the weak economy. We view Enron as one of the best companies in the economy, let alone among the companies in our energy convergence space. We are confident in the company's ability to grow earnings more than 20% annually for the next five years, despite its already large base.
www.actwin.com/kalostr...
Is Amazon's Free Cash Flow Overstated?
Point is- if you were evaluating a business to buy, how would you consider the Cash in Bank at Dec 31, that would be paid out during the next quarter? Would you pay multiples for it? Or would you be more interested in Net Income? (Which in Amazon's has very little of.
Is that so difficult to understand? check out the statement of Cash Flow and see how that large cash balance decreased over $1billion.
finance.yahoo.com/q/cf...
THE CPA JOURNAL
The Cash Flow Statement:
Problems with the Current Rules
By Neil S. Weiss and James G.S. Yang
...Concerning the concept of free cash flows, two points should be emphasized: First, increasing reliance is being placed on free cash flow numbers by a variety of users, including investor analysts, credit analysts, and finance and economics theoreticians. Second, as a result of the many users of free cash flow, a variety of definitions have been introduced for the determination of free cash flow....
The weaknesses with the cash flow statement can be divided into five sections:----
1) differences between commercial and industrial companies versus financial institutions; 2) problems with operating activities; 3) problems with investing activities; 4) problems with financing activities; and 5) the role of free cash flow. The authors offer potential solutions to these problems that could improve the cash flow statement.
The Role of Free Cash Flow-
... The concept of free cash flow was born for this reason. IT IS DEFINED AS CASH WITHOUT ANY RESTRICTIONS ON IT USE. It is available for any purpose at any time. It is similar to the concept of unappropriated retained earnings. Free cash flow has become increasingly important in financial statement analysis, yet the accounting profession has ignored it. ONE CURRENT PROBLEM WITH FREE CASH FLOW IS THAT IT HAS A NUMBER OF DEFINITIONS. As a result, different users may be using different definitions and drawing DIFFERENT CONCLUSIONS ABOUT A COMPANY’S PERFORMANCE....
* Cash provided by operations less capital expenditures
* Cash provided by operations less capital expenditures and dividends paid
* Net income plus depreciation less capital expenditures
* EBITDA less captial expenditures
* Earnings before interest and taxes (EBIT) multiplied by 1 minus the tax rate, plus depreciation and amortization less changes in operating working capital and less capital spending.....
The differences in definitions are based on key issues concerning what should be considered in determining free cash flow:------
.....Should it be before or after the adjustments for changes in operating assets and liabilities? Using a free cash flow figure based on funds-flow before adjustments for changes in operating assets and liabilities takes a long-run view. In the long run, the changes will vanish. Furthermore, these funds-flow numbers are not DISPORTED BY COMPANY PRACTICES SUCH AS DELAYING PAYMENT OF TRADE CREDITORS TO INFLATE CASH PROVIDED BY OPERATIONS....
www.nysscpa.org/printv...
Is Amazon's Free Cash Flow Overstated?
Think about this, for Amazon’s December Quarter- if AMZN received longer payment term on say $300ml of Accounts Payables, of which they paid in December and instead paid this $300ml in January 2008, this would have increased cash at Dec 31, 2007 by $300ml, and also Total Cash Flow From Operating Activities. Using your definition, FCF would have also increase by $300ml- (Net Income would remain the same).
It is correct that CFFOA would be increased by $300ml, but $300ml should not be considered as a part of FCF, it will be used to pay bills so how can it be considered FCF? Including this $300ml in FCF is wrong, it is not FCF. It is true that Amazon earns interest income from the float, but this $300ml is not FCF.
finance.yahoo.com/q/cf...
To consider FCF in valuing a business, you should use the FCF definition that Warren Buffett uses, he would laugh at the one the company and many analysts use.
“Structural free cash flow [SFCF] -- what Warren Buffett calls "owner's earnings" -- is net income from operations plus depreciation and amortization minus capital expenditures.”
You are confusing Cash Flow with Free Cash Flow