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DCF starting point

April 24, 2013 | About:

First post - Hopefully I'm in the correct thread.

I'm fairly new to DCF valuation method. I understand the concepts, the math, and the inputs. My question relates to the "starting point" of the calculation. If we're using free cash flow per share this figure can have some pretty dramatic swings even though some other important values may have risen steadily over time. A company could have steady and significant growth in Rev, EPS, Book Value, etc while have a fairly dramatic swings in FCF or even no growth in FCF. As an example CNI has had steady growth in the before mentioned categories but not much in the way of FCF growth (depending on how you look at it). Or look at a CAT that has also had great historical numbers in Earning, div, rev, etc. however their cashflow is all over the place.

On to the question: If I were trying to come up with a DCF value for CAT this year and I were using 2012 FCF per share I'd be using .25 as the starting point? If it were last year and I was using 2011 number I would start at $4.78? Should I be averaging the last so many years to get a FCF starting point? You get the point. I think this is just the one part I don't understand.

Or am I supposed to be using a different method other than stated FCF.

Thank you.

Rating: 1.0/5 (1 vote)


Gurufocus premium member - 4 years ago
What you discussed is quite true. That is why GuruFocus uses EPS as default instead of FCF per share.

Even company like Wal-Mart has inconsistent FCF, although their earnings are very steadily growing.

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