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| Im Not Warren Buffett |
 Posted: Sun Jan 08, 2006 7:01 pm Post subject: DCF (Discounted Cash Flow) Models |
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CFO
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| I know we've been having a discussion about DCF (Discounted Cash Flow) Models recently. My question: does anyone else have experience with them? I'm looking to write one for cash flow negative companies, and don't have anything to reference except my intuition and understanding of corporate accounting. Any help would be great. |
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| geb9696 |
| Posted: Sun Jan 08, 2006 7:08 pm Post subject: |
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Investing VP
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| I am not sure how you would do a DCF for a company that loses money every year. My feeling on the matter is if a company is not making any money why do I want to own part of it? To me buying companies that dont make money is speculative by nature and I do not think a DCF could be done for them. How do you do a DCF for a company the has no positive cash flow? |
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| Im Not Warren Buffett |
| Posted: Sun Jan 08, 2006 7:11 pm Post subject: DCF Models |
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CFO
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| geb9696 wrote: | | I am not sure how you would do a DCF for a company that loses money every year. My feeling on the matter is if a company is not making any money why do I want to own part of it? To me buying companies that dont make money is speculative by nature and I do not think a DCF could be done for them. How do you do a DCF for a company the has no positive cash flow? |
Well thats the problem: DCFs price stock based on expected cash flows, so if a company doesn't have a cash flow... you see the internal argument. Why own a cash flow negative company? They can pay off very well if you find a good one that is just too young to be making money.
Last edited by Im Not Warren Buffett on Sun Jan 08, 2006 7:30 pm; edited 1 time in total |
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| geb9696 |
| Posted: Sun Jan 08, 2006 7:21 pm Post subject: |
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| But using what you said you are speculating that they will make money and I do not see how fundamental analysis comes into play with companies like that. If you want to you could adjust the model so instead of multiplying the nuber by 1.xxx you could multiply it by the .xxx then subtract that value from the income. This way you can see how long it will take to reach the positive. Not sure how that would work for calulating the actual value though. The DCF would just tell you the stock should be worth nothing. |
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| Im Not Warren Buffett |
| Posted: Sun Jan 08, 2006 7:26 pm Post subject: DCF Models |
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CFO
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I think the problem is that you need to change how growth works, because that directly multiplies with cash flow,which would be a negative number. You could never get a positive value. 
Plus, I believe capitalization rate would be negative, and we know the disastrous consequences of that... Google undervaled by 86% and worth $790/share? We were young and reckless back then... 
I think you need to look at revenues instead of cash flow... but then you need to look at margins, which are also negative! Well, its meant to be a challenge.
"I don't throw darts, I bet on sure things."
Michael Douglas as Gordon Gekko, Wall Street |
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| geb9696 |
| Posted: Sun Jan 08, 2006 7:42 pm Post subject: |
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| I do not see how you would be able to do it. I mean what I said earlier takes into account for years 1 through 5 on the growth scale but I do not see how you could do the cap rate. If you make the cap rate to a negative( which it will be with a negative income company) you switch the value of the company drastically. Does not seem like that would make sense for me. Maybe there is a different type of model to use with companies who have a negative cash flow. There has to be something because analysist give them a target price. |
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| geb9696 |
| Posted: Sun Jan 08, 2006 8:16 pm Post subject: |
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| After messing around with the DCF for a while I found out some interesting things. If you can get the income to be in the positive in the first five years you can take that number and then plug it into a regular DCF model and get a target price from there. I ran the model above for TSCM and using the projected growth percetange from yahoo for last year this present year(2006) they should make a profit of $5,349,916. I then put this number into a DCF using the projected growth % on yahoo for the this year which was 22.7% and then the growth % for the next five years which is 30%. Using this method TSCM should have a target price of 11.88 when using a discount factor of .1. I am not really sure if I feel comfortable in that outlook though. In order to use the DCF in that way the company has to have a projected growth % of over 100 or else the company will never get into the positive until after the first five years. If after the first five years the company is still in the negative then you can not switch it to the regular DCF model and therefore not predict the target price. It seems like I am doing something completely wrong so any input would be appreaciated. |
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| geb9696 |
| Posted: Sun Jan 08, 2006 8:36 pm Post subject: |
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| I tried GM the same way I tried TSCM and I was able to get a target price of 17.83 for GM given the growth % used on yahoo. That would mean that GM stock is currently overvalued by 14.3%. This was using the next year growth % as this years. Meaning that I used the 121.9% growth as a multiplier to get the income into the postive. I then used the postive number as the first year in the DCF model. GM stock being overvalued by 14.3% makes sense to me. |
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| geb9696 |
| Posted: Sat Jan 14, 2006 9:32 pm Post subject: |
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| Ok, after looking back over what I did I realized that what I posted above is not right. The target prices make sense but I do not believe that they are actually accurate. I think that for a company with negative cash flow you have to take the numbers and put them into a FCFF model. I am not very familiar with them. Then take the gross revenue and then after subtracting operating cost and other things you get a income. Using this you then see how long it takes for the company to start making moeny. At this time INWB and I have not figured out how to use these models but I will post and update if we figure it out. |
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| Im Not Warren Buffett |
| Posted: Sun Jan 15, 2006 8:02 am Post subject: |
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CFO
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| geb9696 wrote: | | Ok, after looking back over what I did I realized that what I posted above is not right. The target prices make sense but I do not believe that they are actually accurate. |
I told you that a long time ago.
I haven't been able to work on the negative cash flow model very much, but the little I have done has been fairly productive. But for now, I like sticking with cash flow positive companies.  |
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| geb9696 |
| Posted: Sun Jan 22, 2006 6:59 pm Post subject: |
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| Did you do anything more with the negative cash flow companies? |
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| Im Not Warren Buffett |
| Posted: Sun Jan 22, 2006 7:07 pm Post subject: |
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CFO
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| geb9696 wrote: | | Did you do anything more with the negative cash flow companies? |
No, I've been wicked busy lately... maybe you can tell from the infrequent posting. I should be able to start working on it seriously in about two weeks. I actually haven't opened the (regular) DCF model in a couple days... I could write a poem about the sense of loss I'm feeling right now. |
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| geb9696 |
| Posted: Sun Jan 22, 2006 7:10 pm Post subject: |
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| If you only had time...dont tell me you are spending all of your time writing poems. |
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| Im Not Warren Buffett |
| Posted: Sun Jan 22, 2006 7:12 pm Post subject: |
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CFO
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| geb9696 wrote: | | If you only had time...dont tell me you are spending all of your time writing poems. |
Poems? Not really. Try my independent research paper... why the hell am I doing that? Eh, it has some vague applications to investing, but its just a giant black hole of time right now, possibly because I put it off for so long. I'm hoping the comments I get on the more divisive make it all worthwhile though, there is nothing like laying the intellectual smackdown on the faculty. |
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| DKnightSr |
| Posted: Mon Jan 23, 2006 2:30 pm Post subject: |
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Member of the Month
May
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Hmmm... something like:
Roses are red, violets are blue.
I blew my portfolio, and my GPA too.
???? |
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