Palantir

I think value investing is essentially a defensive strategy, not necessarily designed to produce great returns, but to avoid major mistakes, and I don't believe it is inherently superior to other styles, although there are some talented value investors. Sort of like in soccer how some managers (Mourinho, Herrera, Benitez) prefer counterattacking strategies, while others (Guardiola, Wenger, Van Gaal) build their games around highly attacking philosophies.

The reason being, I think the DCF model has some necessarily simplifying assumptions, eg, that cash flows are paid straight to investors, or that there is no distinction between the investor and the "firm". If the firm just generated 1M in FCF and did nothing with it, it would form a part of the firm's cash account and be an element of value for the company, however if it was used to repurchase shares, it would certainly create value for shareholders, but the way I see it, that value would be counted in your future projections of per share FCF.

I disagree, I think that's exactly what the implication is of doing a 100% buyback. However your future cash flows become higher in exchange for reducing CF0.

Not really. The company is giving you $200K in stock, but in a DCF model, we value cash flows, and cash flows are reduced in the near term for the potential of higher cash flows down the line. Now even if you use your example, you're getting 200K in stock, but if you use higher level of FCF/s growth, it would also trigger double counting because you're adding the intrinsic value of the shares received to the discounted cash flow that is expected of them!

Nothing to sell, my portfolio has gotten killed last 3 weeks.

Not true, it does matter whether the cash is used on buybacks or not. From the POV of a shareholder, the shares are worth different values, and that's the relevant metric, not the value of the firm. You are not the sole owner of the firm.

I am not a developer, I don't really follow your comment. Because the dividend immediately accrues to shareholders and can be valued, buybacks are cash that continuing shareholders do not see, and cannot be valued. Adding back shares doesn't really fix the problem that the cash is being spent from cash that would otherwise go to shareholders, it's an approximation, but it would be more accurate to just subtract the buyback from FCF/s.

That is one way to do it, but what if the firm is persistently diluting shares and/or persistently buying back shares? If you are a continuing shareholder, the valuation will be very different, because as you note, FCF does not change, but FCF/s will change in the future. Hence, I prefer to do it on a per share basis, which is more applicable to continuing shareholders.

Hyten, I agree, the issue is, when you do a DCF, what cash flows do you end up discounting? Company 1 (No buybacks) Makes 1M a year, no buybacks, also does not grow, makes 1M into perpetuity. Company 2 Makes 1M a year, buys back 20%, does not grow FCF either, but grows FCF/s due to buybacks. The way I see it, you have to value these very differently, for the first, you'd discount $1.00 every year with no growth in FCF/s. Whereas in the second you'd start with a base "Adjusted FCF" of $0.80 and project growth into perpetuity. The issue really arises IMO, with firms like IBM, who are growing very slowly, but are buying back hella stock. So there is a lot of FCF/s growth. However, the firm is also basically using all of its FCF in buybacks, so you can't really use all of that FCF to value the firm.

True, I am being lazy with the definitions. I would say the relevant metric for DCFs should be "Adjusted FCF" = FCF - Buybacks. In your scenario, if the firm suddenly stops buying back, then Adjusted FCF = FCF, and then growth becomes 0, which essentially is the pre-buyback state, although now with higher FCF/s due to the buybacks. Now if the firm returned all its FCF to shareholders via dividends, and assuming that no other cash was returned, then in that case, I would not revise the FCF figure downwards, as all FCF immediately flows to shareholders, and more importantly that cash is not reinvested to create growth in FCF/share. Therefore Adj. FCF = FCF, and growth is unchanged.

^Not talking about creating your own dividend, but the concept that you're essentially buying others shares with your FCF, which will reduce cash flow in current term, but raise it later.

I'm not suggesting that share buybacks do not add value, but rather how to account for those buybacks? Let Adjusted Free Cash Flow = Free Cash Flow - Buybacks Say you're investing in a company that makes 1M in FCF yearly, with 1M shares, and zero growth. As a shareholder, you have a claim on $1.00 every year, and this is your "Adjusted FCF/share". However, if the firm allocates 30% of that to buybacks every year, then you are exchanging current flows for higher flows in the future, and as a result, it would be double counting to consider initial Adjusted FCF/s to equal $1.00, rather it should be $0.70, and in exchange for that you can build FCF/s growth into your model.

You see the cash later, but that's because you are forgoing current cash. Otherwise you're counting cash twice.

I'm not talking about whether it is value, but how to account for it during valuation.

No, we are discussing continuing shareholders, not those that chose to sell back to the company. If you are a continuing shareholder, then you will never see the cash, and hence it is an outflow. When the firm buys back stock, you will see an increase in CF down the line due to increased ownership, but that's because you are forgoing current flows in exchange for higher future cash flows. Since you're forgoing current flows, it would be incorrect to count them as yours.

Yes, but the "increase in ownership" is a different component of value from "cash flow". As you noted, the remaining shareholders see an increase in cash flow, but that cash flow only came about because remaining shareholders gave up current period cash flows to do so. In a DCF, you are only valuing the company based on the cash on hand + discounted future cash flows, the increase in ownership, which is true, would not be applicable.

^ You could do that I suppose, but then I think two problems arise: 1) there's no way to account for bad capital allocation decisions and 2) you will have to reduce FCF/share growth to reflect the fact that the model won't have buybacks.

I think you've got it backwards. Return of capital by definition flows to shareholders, it's not a reinvestment in the firm. It doesn't flow to shareholders. When a firm produces cash from operations it goes to the firm's equity, if it's used to buyback, it is an outflow that continuing shareholders do not see.

I think this is relevant especially for IBM. It has strong growth per share, but it is pretty much using up all of its FCF in buybacks, so your actual FCF/s is pretty low, and if they ever reduce buybacks to increase cash flow, then growth will also come down. http://www3.nd.edu/~scorwin/fin70610/Common%20DCF%20Errors_LeggMason.pdf

That's pretty fair....but I'm going to be greedy and wait for sub 170 before I buy.

What's your IV estimate for IBM? I've looked at it many times, it just doesn't strike me as a "great" opportunity...but just an decent, low risk place to put cash.

I have never searched for Arab girls! Really...

Btw, OT, this forum is displaying ads for "Sexy Arab Girls". What's up with that?

I think we should leave everything the way it is, I think the complaining about the tech threads is getting as tiring as the tech threads themselves.

I have been stalking particular investment firm, whom I'd rather not name, because a member of a forum I frequent works there. Apparently, they've kicked a$$, and have some fascinating small cap picks. EDIT: That sounds creepy.