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Learning about Free Cash Flow Yield | Michael Fairbourn, CVA | 2-11-20 | Investing in Value Stocks

February 14, 2020

alright let’s go ahead and get started good evening everybody good to have you here for our investing in value stocks my name’s Mike fair but folks you can follow me there my twitter handle it and for everyone underscore TD a but great to have you on board today this evening we’re going to talk about performance metrics so the last couple of weeks we’ve been talking about really some of the valuation concepts and investors traders use to see where a particular security is relative to its underlying value we also though talked about the importance of having a growth component in there so that when an investor is purchased purchasing a particular security it’s not forever a bargain right and that’s looking at the performance metrics of the company wanting to see what do the growth parameters of a company look like we’re going to talk about a key growth parameter this evening I look forward to going through that with you’re going to talk about free cash flow and the yield of free cash flow per share and why analysts institutions use this as well as traders and investors so great to have you on board we’ll hit our agenda in just a moment but let’s go in and hit our disclosure items first so good evening to you dog dog fan as well as Ricardo and Jerry good to have you here please utilize that chat box love to hear any questions you have as we go through this in fact I do have a portion in here of our discussion where I do want to kind of ask each of you some questions as we go through a couple of different points so I want to get your feedback and always love to get that through the chat box but we will do that momentarily so let’s just hit our disclosures and jump on into this folks please remember stock markets are volatile and can decline significantly in response to adverse is you were political regulatory market as well as economic developments also remember futures and future options trading is speculative it is not suitable for all investors please read that risk disclosure as futures and futures options as well associated with that please be my phone these other points that are listed here also international investments do involve risks special risks including currency fluctuation political and economic to build in stability type risks be mindful of that as well as investments in commodities not suitable for all investors ok these points always consider transaction costs they do factor into your total loss or profitability on a particular Patroni application which we’ll be looking at a stretcher cases only passport for passivity security strategy is not guaranteed for social success and all investing does involve risk including the risk of loss all right so we’re all set there let’s jump into this hello to you Robert great to have you on board welcome to everybody that is new as well as our veterans that keep coming back each week love to have you all here and looking forward to going through this with you so folks in terms of our agenda this evening I want to talk about we’ll do a brief market overview we’ll look at the sp500 index I think it’s some updated information as well on the wuhan virus and I want to talk about just some risk factors generally speaking as you look across the market in all your you know potential investments so I wanted to definitely address that in terms of performance metrics right that is the growth component we’ve been talking about value but it is important to have growth so that the the price of a stock can achieve its potential fair value we looking at free cash flow now we’re looking at a few different metrics over the next couple of weeks as we really talk about what investors and analysts frequently will utilize for growth will break that free cash flow down to free cash flow use we’re going to define that we’re going to get provide some information I’ve got about seven or eight stocks as well that meet parameters and traders investors might look at that have relatively high cash flow yields free cash flow yields so I want to share it just take a look at those securities is a you know kind of a list of stocks that investors traders might also find so looking forward to going through that with you folks let’s start off first the first things first market overview I want to take a look at the market here is the S&P 500 index we’ve got our agenda over on the left-hand side and you can see we’re still climbing higher here we did test a high range over here to the top and in fact if we zoom in on this you can see I’m just going to narrow it into it a little bit of a tighter range we’re clearly above and if I can make an extension here for you I’ll do it in red or any color but this is an upper Chan remember those channels if I can draw that diagonally there’s an upper channel line that continues through here now that can act as support or resistance depending from where we’re at but we’re above it now so it could be an upper support level if in fact prices pull down now a technician might look at this and say well this is actually we’re not actually at a decent situation because we just broke above a previous high range and we’re holding above that level right now so that is interesting sort of a minor sort of shooting star today I don’t think it was a technically a shooting star with a shadow or that upper line that’s the high of the day was twice the size of the body but sometimes that can be a bearish sort of a candle type indication didn’t see that here completely it was kind of shooting star dish but it could consolidate there but yeah previous high right through there which was an all-time high going back last month we might end up holding at this particular level as an initial support point but clearly higher highs higher lows continuing today was certainly a higher high as this trend continues to climb on higher okay now a quick view over here – I’m going to save some time I’ve actually got this pulled up in terms of our market forecast so this market forecast signal has helped investors in the past the way they utilize this they’re using the intermediate term market forecast line if you are above on the intermediate term line if you’re above that 80 level and holding above it as long as you’re just holding above it it doesn’t matter what direction it’s going the market is kind of giving you a bullish bias in other words you could say the markets giving you an okay to take on long term or I should say bullish type positions they could be long term they could be short term but it’s giving you that bias and you’re getting that when you’re above 80 now when you’re below 80 and pointing lower it’s a different story when you’re below 80 but pointing up it still gives you a bullish bias and investors traders will use and that’s just simply because you could see really from this extent over here if I draw this up again let me just drag this over here make some quick annotations just with our drawing tools here but when you when you do extend above that 80 for a period of time it tends to mirror a bullish condition in the market now that’s not going to happen every time but that’s really why traders investors will often utilize a tool like this is because look at this you were bullish over here did it pick up when you were bearish it did you began to drop below that 80 how about over in this range well let’s take a look at it OOP got to draw these straight with that freehand so there you go did it pick up on this range it did that was a bullish type scenario in the market how about even over here when you were at least above your twenty line in pointing higher absolutely so just a quick bullish bias on the market as well it shows some strength there for us to kind of consider now I did get some additional information on an update on that Wuhan virus out of you know the epicenter is writer in China there you’re all familiar with that but some of the risks that could be associated with it now with China being such a huge economy what can be impacted I just want you to be mindful of this oil oil prices could be so kind of maybe you want to be keeping an eye on oil this is historically like a low level on oil but if people aren’t using more oil and more production well then that could impact us and there are a lot of people in China that could impact price of oil potentially that could happen in addition copper what’s copper known for well copper is one of those materials you can see the drop over here pretty dramatic that’s associated with a lot of building products and construction products right home in brew you know home development commercial developments a lot of expansion and you see that within China but that’s really what’s impacted this copper price now because it had an underlying impact right now maybe not but this is speculators anticipating too that would be the case down the road so prices are just first so be mindful of stocks that fall into these areas I just want to point that out to you also Chinese ADRs there some out there not to pick on them but here’s Momo you can see it dipping down here you get JD there’s another one Cena there’s quite a few but a little bit of a pullback this has been down for a while anyways I believe Cena is yogs I’m seeing some Chinese print I thought it was but a tea ours is well cruise lines United Airline UAL is as tended to be a big one that really services China a lot so just want to throw that out there to you they don’t want to spend too much more time on this too much of that actually a al was one American Airlines was one that we held in our long-term portfolio due to less exposure to China and just underlying valuations and growth and it this one actually pops so it’s not all Airlines it’s just a few that kind of specialize in that particular area okay so having said that let’s jump into our concept right now so as we talked about valuations for the last few weeks we talked about the importance of having growth with a growth component a fundamental metric that shows growth in a particular business we looked at timeframes that might be necessary to hold on because you might need to needing to go through an earnings cycle another earning cycle at intermediate timeframe six months it takes time as a matter of fact institutions and analysts will oftentimes get in six months or more because they want to go through earnings cycles because they think earnings is going to be higher and stronger they’re so big that they can’t play jasbo flags or Head and Shoulders patterns right they’ve got to stick with a company and try to get some good earnings announcements to show that the business is growing and therefore the prices are lifting higher long term more than six months and it can take those timeframes for the value of a business from an undervalued level this is a slide we’ve showed a few times to get up to a estimated intrinsic value a higher valuation right so what can drive that what can drive an undervalued company to a potential fair valued situation right whether we’re looking at valuation rate show metrics we’ve looked at we looked at the intrinsic valuation calculator for the last couple of weeks I could put a link into a prior discussion that we’ve had by the way I can do that if you haven’t seen those discussions but that was just all about cheap prices right it didn’t really totally incorporate growth we talked about the importance of growth but that’s what we’re going into performance metrics now can we find undervalued companies that also have growth components to give them a catalyst or a driver a reason to obtain their fair market value that’s we’re gonna be talking about tonight okay so I got to get into this quick and we’re gonna be hitting this for the next few weeks but very important in any you know whether you’re looking at valuation you know stocks that are undervalued or just growth stocks you want to be able to reference fundamental metrics performance metrics so let’s do that right now let’s let’s go in here and let’s talk first what I want to discuss is the concept of free cash flow now you’d find cash flow right off of here’s an airline actually that made the list I was mentioning to you that traders investors might look at a sample example list of stocks that have a high free cash flow yield Southwest Airlines I just put the symbol in here and if I go under fundamentals I’m gonna show you what the where the free cash flow is or where you can find cash flow and actually get free cash flow the number so if you click on free cash flow here or cash flow what we’re looking at is cash from operations so the reason why the companies in business in the first place is it going higher is it staying stable generally speaking is it is it ticking up over time that’s what investors want to look at how you get free cash flow so you take cash from operations this number I’m going to scroll down and show it out or show it to you total cash from operations 20 19 so there’s your 3.9 billion those are a million so 3.9 billion and you subtract out capital expenditures when you do that what you’re doing is you’re taking out all the cash that but he’s reinvesting to keep their business running and to grow the business this is what’s left over for the shareholder free cash flow okay so this is a very important concept if you track what analysts look at or institutions many in many cases that they always they come back to free cash flow what is a company generating for the shareholder but you know what are they generating in terms of cash not earnings which is an accrued number I’m talking cash that’s coming in and actually being received by the business what does that number look like what does that do well that can lift the earnings for a company if a company has increased cash there are a few things that you’re gonna find with these companies in fact I’m going to scroll down and we’ll just type this in here while we’ve got it so when we look at that so what would we have well we’ve got sorry about that let me just pull this down so if you have increasing free cash flow FCF for short I want you to be thinking and type maybe a question in the chat type a comment in or an answer this question into the chat box but normally what you’re able to do a few things I mean you can pay down debt now as I’m going through this I want you to be thinking about what can drive share prices higher free cash flow coming into the business is one of those key metrics that are frequently used by analysts investors institutions because it can drive debt levels lower now if I have lower debt pay you can pay down debt that can improve future earnings per share of a business it can you know all that’s being equally sure can what if what else can a company do if it has additional free cash flow well they can buy back shares if you have less shares to spread out those earnings across that to can improve future EPS numbers okay so a lot of positives can come from this in addition what else can a company do with free cash well they can buy they can purchase growing companies to enhance their own business they can make acquisitions they can also expand existing product lines right international exposure how about yeah so like you know let’s just say international but int L for sure we can expand international product lines they can create new new products create new products or services right a lot of positives can happen if you get improved cash coming into the business there’s no doubt about it exactly thank you for activating that Venkat he’s done the calculation for us I’m gonna put a few things in there by the way Robert says buy back stock buyback new shares of the stock absolutely that can all help and so you start to wonder you start to say well now I can kind of understand why so many individuals might be interested in the free cash flow in terms of evaluation all right so a key point there for sure so we’re going to take it a step further and get it down yet increased dividend payouts definitely you have more cash you can path those dividends look at this to a van cats point which is a great point if we come down here cash from financing that’s where you’re gonna find the three types of cash flow cash from operations which we’re talking about here financing as well as investing but that’s where you can see total cash dividends paid that numbers going higher because they have cash to pay it out so yeah improve dividends what a great way to improve your your cost to yield on particular stock okay so some interesting points there as well now a couple of a different additional points I want to bring up to you as we go through this okay so I want to mention we do have an analyst report over here and I brought this up a number of times as I go under analyst reports right here an analyst report one of the companies here the TD Ameritrade purchases for for us in terms of all of us that we can access additional research information is this new constructs and it will do forensic stock earnings valuation now they look at free cash flow what’s called the free cash flow yield which I’m going to talk about now so let’s pull this up and take a look at it if I just click on the company I’m after it will pull up a breakdown of this business that you have access to you can print it off you can download it it’s a great tool to have and new constructs provides this and you can see over here for for Southwest Airlines symbol Lu V you’re like whoa wait a second everything’s in the green down here it’s very difficult for a company to meet all these different criteria we’re discussing some of this criteria in future weeks here because there’s a lot of analysis that analysts will do right traders institutions will do so a lot of this is in the top quintile or top 20% of companies I think the valuation metric for free cash flow yield folks is even higher in other words it’s it’s more than the top 20 percentile if you’re looking above 10 percent so what is this telling us well what we’re doing is we’re comparing this free cash flow yield in fact let me go down to it just give a quick description of what they’ve got there it is free cash flow yield reflects the amount of cash free for distribution to all stakeholders or shareholders right stakeholders because you’ve got debt and equity everybody free cash flow yield divides free cash flow by the enterprise value that’s the total value of the business so there’s another way to do it to a lot of it people want will divide that by the market capitalization whatever the case is what they’re doing is they’re comparing the total value of the company to the the free cash flow yield so what percentage is this company pulling in in terms of just free cash of the total business itself well the business the total business is pulling in 10% so it’s just giving us a comparison of how much free cash to that business whatever we want to look at it enterprise value market capitalization I think enterprise value is the way that most analysts use it is a little bit more in depth makes a little bit more sense but enterprise value so we got it let’s break this down a little bit more when we’re when we’re thinking in terms of this so this 10% that it showed this company is generating 10% or greater than and I can give you the actual numbers 15% lu v is 15% now stop and think for a second if we’re a shareholder and this company is returning to us 15% in free cash flow that’s money outside of what’s required to run the existing business reinvestment in the existing business and even some additional investment we are we talked about what they can do with that cash they can grow the business further down the road so folks that can be a very helpful driver when you’re looking at this over here to get prices up that’s why it’s such a key role in forensic accounting which a number of coming that’s what institutions analysts are looking for right that’s the key focus so let’s go back to this right now and take a look at that now that’s lu v that was at 15% is a sample example I can pull this back out a little bit further I’m gonna move this back to maybe a two year here one year has it – it does so you can oh I’m sorry that’s not the one now you’ve got to re-up date that there you go so we’re looking at this right now so it’s it’s very interesting to try to find something that’s driving this now what historically investors will do is they’ll say a stock if it continues to grow in the future and compound that growth that’s a positive so they might look historically at what a company’s historical growth rates been we talked about that last week remember the bar graph take a look at our discussion last week I’ll link that to the end of our discussion here that webcast for you in the archived version but think about what that growth could mean into the future if it keeps expanding and growing if you see a trajectory a history of growth that could be very positive for a particular business right expansion of growth typically what else do you get an investment what if I just buy a long term bond tyx that’s two point you move that decimal over one two point zero five percent is what a 30-year Treasury is paying us and you can take more risk with a corporate bond right but there’s more risk there can you find a bond out there that pays ten percent what about fifteen percent that’s the rate of return that this company is returning on it’s free cash flow yield think about that let that sink in for a second that’s how investors need to look sometimes it’s stock that’s how that many of them do right what is this business generating for me aside from all additional expenses to reinvest in that business and to run the existing business for Lu V 15% if we’re using that metric and that’s why institutions analysts will use it folks and that’s why it’s valuable okay now we want to make sure that the company is going to continue to grow in the future so we look for that historical bargraph of projections I’ll just quickly show you running at a time here but I’m gonna close this for now and just like over here on the fundamental so you’ll see this I’ll put a link but ya never income statement we want to see what is sales growth total revenue look like is it growing what have we learned about the company what about projected earnings that you’ll find over here under earnings but very helpful to have that free cash flow growth rate there hopefully that makes sense that’s the concept that I wanted to give you they’re going to keep tying in to this and trying to look at particular securities as we go through this I’m going to go ahead and put in some of the Securities right now into let’s just do this at the time we have remaining and I’ve got a question I’ve got an answer right at the end here as well so let’s do this I’m just gonna this is just kind of a sample example these are not recommendations but we’re just going through this process explain to you so just we’ll just start at the top and kind of go through so see a 23% that was the the highest we’ve got GBL 19% these are free cash flow yields to the business as we’ve explained it kW 18% kind of going on down the list here Lu v15 with a couple more Sina now this was a Chinese company so remember we talked about the risk with Chinese companies that can’t be an issue l AZ we just put these in v-a-l-e and M CFT which has actually come up in a couple of other classes that we’ve looked at these are all 13 down through here 13 13 13 I took a little time appreciate your patience on that but that’s what we’ve got so let’s just quickly go through some of these some of them you know technically speaking I mean there’s a long term support level that actually extends back a few years on this Comerica are right around 60 but maybe that’s not enough maybe an investor might want to see a trend turn higher right if you’re looking for technicals GBL once again one that’s been quite low but maybe a support level according to previous levels of some you know lows here right around 16 so I want you to just kind of go through you can go through look at these lists or other companies and so once you have the symbol what I want you to do is plug that into new constructs take well you know take a look at that free cash flow yield look at other stocks within your own portfolio to see where they might fall it’s a really good driver for the reasons that we mentioned previously so nothing’s a hundred percent but this is what institutions will talk about frequently right because of all the positives that we’ve mentioned here okay there you have it and venkat says yeah free cash flow figures available in the toss fundamentally sure folks these these can be helpful but I want you to use that tool on your within your portfolio of stocks or your watch your watch list just to see where it might fall the for the free cash flow yield how much is it actually giving us is it better than bonds well why don’t we compare it to other company in the same industry just to make sure that maybe we’re above that level but I just wanted to give you a reference so 10 plus percent is actually quite high that’s a decent rate turn relative to what new constructs is telling us and that’s kind of historically some numbers that have been thrown out there too you might have different numbers but that’s what they’ve got there so we’ll spend some time looking at these in fact we’ll look at these stocks a little bit more detail some of them towards the end of the week in are managing a whole portfolio as well because certain metrics there’s a number of them that just institutions will just buy they’ll pay I mean they’ll follow more closely and so you can find where they might be interested in certain areas this particular company broken above and kind of holding this longer term support level after making some new highs so interesting by the way this company – you can always look for things that Venkat was mentioning dividend yield about 4% so something else that could be that investors might look for not necessarily in this stock but just any stock in general based on additional criteria okay alright folks well it’s been great being here with you I know that was just a point can you show us free cash flow and toss fundamentals yes I can let me quickly show you under analyze if I scroll under here look at this and I really appreciate Venkat pointing that out because you do have look at that free cash flow per share is it climbing cool trend right there so remember analyze tab make sure your symbols and we’re still in hell you use me this is kW this is going to be a fun activity to go through some of these stocks or other ones in your portfolio climbing higher five-year trend you can go annual or quarterly it’s right there for you alright so we can we’re gonna have to jump to that next question going on I didn’t think about that one but it is an interesting point that we can look at going forward but the calculation of the free cash flow you take operating cash flow you take then you reduce your capital expenditures expenditures from it divided by the total shares outstanding get you your free cash flow per share the yield would therefore then be divided but by two two different denominators one of two enterprise value or market capitalization new constructs uses enterprise value it seems to be a higher maybe a little bit more in depth ratio to utilize okay so on that note folks I hope you found this useful great to have you here we’ll look at some of these other stocks later in the week because institutions analyst will look at them so great to have you here hope you have a great rest of the evening I wanted to quickly point out to you that yeah we talked about this as well so historically will growth continue in the future that doesn’t go away from previous discussion so in terms of our agenda folks we did a market overview S&P 500 in this we talked about the Wuhan virus that situation what to look out for we introduced you to performance metrics more of that in the next few weeks so please stick around love to have you attend as we go through this as we hit the concept of free cash flow yield all right so great to have you on board folks please remember the Norden demonstrate the function of the platform I did use actual simple cyber TD Ameritrade it’s not make recommendations or determine suitability any security strategy for individual traders any best decision you make yourself as you can’t sell your responsibility on that no great being with you and happy to introduce you to these new concepts look forward to it each week everybody have a great rest evening see you next time bye bye thank you you

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