jeudi 11 mai 2017

Free cash flow champions

Free cash flow:

Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand it's asset base. FCF is important because it allows a company to pursue opportunities that enhance shareholder value.

OK, enough with copy/paste. Let's go for some original content.

I've never used FCF that much. In fact, that element has always been obscure, or at least, not very important to me.

But, it's never too late to grow up. Because I've understood very recently that this element is much more important than what I thought. In fact, almost all the stocks that achieve growing FCF over time are great business. And it's not very hard to understand: If a business makes more and more money, year after year, whatever the expenses are, it's probably a good business.

So, I went to analyze some stocks via Morningstar to see how many business were able to grow their FCF in a steady way over the last 5 years. My criteria was very harsh: the stock had to grow it's FCF every year, without any exception. So, if a stock had a very good steady FCF growth but had only a slight decline only one year, it failed the test.  Let's try it with your stocks. You'll see that it's VERY hard to find stocks that grow their FCF every year.

Here's a list of free cash flow champions: stocks for which the free cash flow have been constantly on the rise over the last 5 years. There's 5 foreign stocks (mostly US) and 5 canadian stocks.

Foreign/US stocks:

Middleby (MIDD): UP 308%
Novo Nordisk (NVO): UP 38%
Priceline (PCLN): UP 170%
Discover financial Services (DFS): UP 77%
Facebook (FB): UP 293%

Canadian stocks:

Constellation Software (CSU): UP 672%
Enghouse Systems (ENGH): UP 329%
Open Text (OTEX): UP 256%
Canadian National (CNR) UP 152%
CCL Industries (CCL-B) UP 702%

Benchmark (S&P500): UP 77%

I don't know if my approach is scientific, but over these 10 stocks, only one did worse than the S&P over a 5 years period. And it wasn't an ugly performance...

I think I like that FCF approach. 

5 commentaires:

  1. Some investors do not trust p/e ratios. You can play with earnings. I mean, yahoo finance has concordia going for a next year p/e of 1. You can also use excessive debt and that will distort ROE. Do not trust the ROE numbers of companies that owe billions.
    An ever-growing pile of free cash flow is harder to fake.
    Good things happen to companies that keep growing their free cash flow every year. One of Canada's great cash flow machines is Lassonde Industries. For an investor, the chart of this stock is just a beautiful thing. From $13.20 in January 2000 up to about $235 today with no significant drops. They make apple juice and other beverages. It seems like a safe business.

  2. Free cash flow is important for sure, but you should look at it in terms of the company’s life cycle (micro, small, mid, large and mega-large cap). A small company if it has any free cash flow will often plough it back into their core operations (research and development, advertising and marketing) to grow their business: that being the case it can be a volatile figure. Sometimes it’s a good idea to compute a rolling 3 or 5 year average of free cash flow. One good metric to use is free cash flow divided by sales. If this is consistently above say 10% that’s a good indication that the company can self fund their business.

    A company that can self fund itself will be less reliant on the debt markets and/or raising additional equity through investment bankers and that can only be a good thing.

  3. RE: The April 27 Blog Entry entitled: WHEN IT STINKS

    The above-mentioned blog was important. It tried to open our eyes to possible clues that things may not be as rosy as they appear. The other day, I came across a high level and in depth stock analysis of Valeant that could have warned us to stay away. More impressively, this bit of stock analysis is not recent, it is from 2015 when Valeant was trying to acquire Allergan.
    I'm going to provide a couple of links because this is what high level and in depth stock analysis looks like. This is how we see warnings signs even before others have the slightest clue. Here's a chance to go into the mind of an analyst and to see the process of how an analyst senses that a company stinks.

    Valeant: A Detailed Look Inside a Dangerous Story Well Told – PARTS I, II & III (link follows):

    part 4 is here:

  4. Thank you Angelo. I really want to use this blog to become better and help others to become better as well.