Comments on: Three’s a Crowd http://stockmarketbeat.com/blog1/2006/05/31/threes-a-crowd/ Our beat: The stock market. Our job: Beat it. Thu, 16 Oct 2008 06:51:25 +0000 http://wordpress.org/?v=2.2.1 By: Stock Market Beat » Blog Archive » Wall Street at its Ugliest http://stockmarketbeat.com/blog1/2006/05/31/threes-a-crowd/#comment-1551 Stock Market Beat » Blog Archive » Wall Street at its Ugliest Mon, 21 Aug 2006 21:06:16 +0000 http://stockmarketbeat.com/blog1/2006/05/31/threes-a-crowd/#comment-1551 [...] Just last week L-3 shares were downgraded, with the analyst “citing uncertainty over option grant timing, pricey acquisitions and a lack of visibility with succession planning.” [...] […] Just last week L-3 shares were downgraded, with the analyst “citing uncertainty over option grant timing, pricey acquisitions and a lack of visibility with succession planning.” […]

]]> By: Trent http://stockmarketbeat.com/blog1/2006/05/31/threes-a-crowd/#comment-41 Trent Thu, 01 Jun 2006 14:38:23 +0000 http://stockmarketbeat.com/blog1/2006/05/31/threes-a-crowd/#comment-41 One reader asked the question (on another page) of why we consider the acquisitions as part of free cash flow. The simple answer is that if you look at the operating cash flow, it includes the benefits of past acquisitions. If you never take out the acquisition you are pretending that it didn't cost anything, but you still count the benefit from it. That just doesn't work for us. If you are using a free cash flow measure that doesn't count acquisitions, it is ok if you are making the assumption that they will not make any more acquisitions. Then, when you are estimating the growth potential you should be using the organic growth rate rather than one that is helped by acquisitions. As long as you are applying a consistent growth outlook with the cash flow measure it should work out. However, the relevant comment in the Smart Money story implied that cash flow was strong enough to support both acquisitions and dividends. Based on recent history, cash flow is not sufficient to support both. One reader asked the question (on another page) of why we consider the acquisitions as part of free cash flow. The simple answer is that if you look at the operating cash flow, it includes the benefits of past acquisitions. If you never take out the acquisition you are pretending that it didn’t cost anything, but you still count the benefit from it. That just doesn’t work for us.

If you are using a free cash flow measure that doesn’t count acquisitions, it is ok if you are making the assumption that they will not make any more acquisitions. Then, when you are estimating the growth potential you should be using the organic growth rate rather than one that is helped by acquisitions. As long as you are applying a consistent growth outlook with the cash flow measure it should work out.

However, the relevant comment in the Smart Money story implied that cash flow was strong enough to support both acquisitions and dividends. Based on recent history, cash flow is not sufficient to support both.

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