Thanks for the post. Can you explain some more of the rationale behind the Smoothed FCF calculation, in particular multiplying the Avg 7 historic FCF by (1+g)^5? I'm guessing there might be an assumption that the mid point of the last seven years is T-4 years, so moving that forward 5 years and dividing by curent market cap gives T+1 normalised FCF yield? and if so, g should be average or sustainable growth of FCF?
Exactly. We are just trying to move it forward to a forward-12 month equivalent. It’s obviously rough, but the whole idea of the process it so be approximate but useful.
In the template, I use a very approximate partial reversion to the mean approach for growth rates. Again, the point isn’t precision - you aren’t using this to make an investment decision - the point is to roughly figure out the company economics, financial profile and how attractive the stock is for further work.
This is very helpful, thank you! If you have a company like FTAI (not interested, just an example) one year ago, who is investing heavily in inventory, infrastructure, acquisition, etc., and FCF is terrible, net debt is still high-side, but you have economic profit starting to climb and EV cap rate is turning strong - is this a pattern you flag and dive into potentially?.... (thinking about this more I see now this gets down to your/our pattern-level comfort and proficiency as an investor).
Thanks for the post. Can you explain some more of the rationale behind the Smoothed FCF calculation, in particular multiplying the Avg 7 historic FCF by (1+g)^5? I'm guessing there might be an assumption that the mid point of the last seven years is T-4 years, so moving that forward 5 years and dividing by curent market cap gives T+1 normalised FCF yield? and if so, g should be average or sustainable growth of FCF?
Exactly. We are just trying to move it forward to a forward-12 month equivalent. It’s obviously rough, but the whole idea of the process it so be approximate but useful.
In the template, I use a very approximate partial reversion to the mean approach for growth rates. Again, the point isn’t precision - you aren’t using this to make an investment decision - the point is to roughly figure out the company economics, financial profile and how attractive the stock is for further work.
This is very helpful, thank you! If you have a company like FTAI (not interested, just an example) one year ago, who is investing heavily in inventory, infrastructure, acquisition, etc., and FCF is terrible, net debt is still high-side, but you have economic profit starting to climb and EV cap rate is turning strong - is this a pattern you flag and dive into potentially?.... (thinking about this more I see now this gets down to your/our pattern-level comfort and proficiency as an investor).