WallStraits 8 Business Screens

[Musicwhiz]

Was reading through this thread again, and I realized that the business screens did not include a very important aspect - that of free cash flow generation. This is the lifeblood of any company and thus should rank among the 1st three most important points to watch out for!

[Nick]

Was reading through this thread again, and I realized that the business screens did not include a very important aspect - that of free cash flow generation. This is the lifeblood of any company and thus should rank among the 1st three most important points to watch out for!

MW, I believe MTQ doesn't generate FCF

[Musicwhiz]

MW, I believe MTQ doesn't generate FCF

Yah, except for 1 year out of 5 years. This was a point mentioned by another forummer.

I acknowledge this, and admit that I am investing in MTQ based on their other business characteristics and fundamentals (e.g. margins, financials, scale of operations). Am also waiting to see how this investment pans out.

[wsreader]

A popular method to compute intrinsic value is to discount the FCF. This method cannot be used for a company with negative FCF.
Good that there are many gurus here willingly share their methods with us. Had learnt much from them to expand my repertoire of valuation tools.

[chern]

Since many forumers are originated from the former WallStraits forum, I believe most will remember the 8 business screens of the WallStraits :

1. Consistent historical sales and earnings growth
   
2. Conservative Financing with total debt less than a single year's net earnings
   
3. Consistently high return-on-equity (ROE), > 15% each year
   
4. Intelligent Capital Allocation Decisions
   
5. Business is easy to understand, and Management is open and honest
   
6. 2x5y: Industry sector supports doubling of sales and earnings
   
7. Sustainable Competitive Addvantages are evident
   
8. Attractive Valuation based on Discounted Cash Flow projections
   

'WallStraits 8 Business Screens' is based on Warren Buffett's investment principles except for the following:

2. Conservative Financing with total debt less than a single year's net earnings

Quote: 'A key characteristic of both companies (BNSF and MidAmerican Energy) is the huge investment they have in very long-lived, regulated assets, with these funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is not needed: Both businesses have earning power that, even under very adverse business conditions, amply covers their interest requirements.' (Source: http://www.berkshirehathaway.com/letters/2010ltr.pdf)


6. 2x5y: Industry sector supports doubling of sales and earnings

Quote: 'The boxed-chocolates industry in which it (See's Candy) operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.' (Source: www.berkshirehathaway.com/letters/2007ltr.pdf)

[Musicwhiz]

Thanks Chern,

I guess it ultimately boils down to how well an investor can analyze the business, including ALL stakeholders. This is very comprehensive and requires a lot of diligent study, research, reading and "ground work". As Munger put it, investors need to have a multi-disciplinary model in their heads to be able to invest successfully. Not only must you be good with the numbers (and understand them well, including accounting concepts), but you should also understand business strategy and business concepts relating to Management, rational and efficient allocation of capital, tactical decisions and operational aspects. These will help shape your understanding of the business at hand.

And yes, I would like to add that it's very hard work, but the rewards will be well worth the efforts!