Here's what I like to plot using the great charting tools available at TradingView:
1. Free Cash Flow
2. Price to Sales Ratio (PSR)
3. Average Basic Shares Outstanding
4. Long Term Debt (excl lease liabilities)
5. Total Revenues
6. Market Cap
From this I can assess how the structure of the company has changed over time.
For example: Did the company go into more debt over the last 5-10 years and reduce shares outstanding? If so, are they generating higher Free Cash Flow (FCF) overall as a percent of the market valuation (mkt cap)? I like to see the stability or growth in revenues overall and the valuation that the market is placing on the shares of the company. If you look at enough companies, you can see what the market is paying for and decide what you might be willing to pay for any company you are studying.
Sales growth can help cover up a lot of trouble from having a lot of debt, which seems obvious. A lack of sales growth can destroy any chances of ever being able to pay off debt or increase dividends, which means you wont pay as much for a company.
Looking at $CAT here: Compare to 2007 and you can see that debt is up $9 billion, Free Cash Flow is flat, shares outstanding are down 15%, and YET the stock valuation has TRIPLED over that time frame, which doesn't make a lot of sense to me.
1. Free Cash Flow
2. Price to Sales Ratio (PSR)
3. Average Basic Shares Outstanding
4. Long Term Debt (excl lease liabilities)
5. Total Revenues
6. Market Cap
From this I can assess how the structure of the company has changed over time.
For example: Did the company go into more debt over the last 5-10 years and reduce shares outstanding? If so, are they generating higher Free Cash Flow (FCF) overall as a percent of the market valuation (mkt cap)? I like to see the stability or growth in revenues overall and the valuation that the market is placing on the shares of the company. If you look at enough companies, you can see what the market is paying for and decide what you might be willing to pay for any company you are studying.
Sales growth can help cover up a lot of trouble from having a lot of debt, which seems obvious. A lack of sales growth can destroy any chances of ever being able to pay off debt or increase dividends, which means you wont pay as much for a company.
Looking at $CAT here: Compare to 2007 and you can see that debt is up $9 billion, Free Cash Flow is flat, shares outstanding are down 15%, and YET the stock valuation has TRIPLED over that time frame, which doesn't make a lot of sense to me.
Comment:
Amazing to me that $CAT still has doubled in value from 10 years ago but its sales are flat. I think people are starting to do their homework and understand what "claim on earnings" they have with the stocks they invest in. As we entered in 2022, there were so many companies at extreme valuations. Thanks to the great tools we have at our disposal here at TradingView, we can see what you get for each $1 you spend on a stock. Overpay and you take too much risk. $CAT is still expensive even though the price has come down a lot in the last 6 months. Stay tuned.
Comment:
$CAT did fall to $160.60 in 2022, which was down almost $85 from the high at $245 just before the original publication. Long term fundamental valuations do help for long term investing strategies.
The idea to sell long term leaps (call options) against $CAT has also been effective over the time frame of this publication so far.
Tim West
January 2, 2023
The idea to sell long term leaps (call options) against $CAT has also been effective over the time frame of this publication so far.
Tim West
January 2, 2023
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