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Fool.com: Importance of Enterprise Value [Drip] February 21, 2002 on 2007-06-27
- enterprise value, which is the true economic value of a company at any given moment. Enterprise value is market cap plus long-term debt and minus cash and equivalents,
- Enterprise value measures what it would actually cost to purchase the entire company
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- - Many investors use the current value of all of a company's outstanding shares as a proxy for its economic value. Known as market capitalization, the current market value of all of a company's shares is equal to the current number of outstanding shares multiplied by the current share price:
    Market Capitalization = Number of Shares Out * Current Share Price
  - Shares outstanding can be a little trickier, but truth be told I only use one source to find this number -- the latest quarterly earnings press release or SEC filing.
  - Now, if market capitalization is the value of all of the outstanding shares, why use enterprise value at all? I mean, enterprise value only appears in a few business school textbooks that focus on cash-flow valuations.
  - The rest of the investment media uses market capitalization. Well, let me let you in on a little secret. Wall Street is many things, but it is not thorough and it is not scientific. In fact, it is downright scary when you look hard enough and see that there is really no unified body of knowledge outside of the quite excellent Chartered Financial Analysts program (which has only about 40,000 graduates total ever) that analysts, market strategists, and pundits draw from. Carpentry (a quite noble profession) has a more rigorous set of intellectual standards.
  - Using only market capitalization to value companies is kind of like using the down payment on a house as a proxy for how much a house is worth. The larger the mortgage on the house is, the more wrong you end up being.
  - Another very important factor to consider when analyzing a company is what it has in the bank. If a company has a hoard of cash or significant equity stakes in other publicly traded businesses, these are pretty easy to value and are obviously sources of liquidity for the company. Going back to our home example, say you bought a home for $70,000 -- $20,000 in cash and $50,000 in debt after assuming the mortgage. When you walked in the house, you found $20,000 in cash left by the previous owner. After putting this $20,000 in the bank, your effective purchase price becomes $50,000. Although you paid out $20,000 to the owner, you got it right back.
  - If a company has $20 million in cash in the bank, it is not like the outgoing Chairman can put it in his pocket as he leaves. That money belongs to the company -- and those who own the company. If someone is buying the company, that money really belongs to him or her. No one else can take it. As a result, when the old owners are paid off they are paid off with cash from the new owners -- leaving any cash in the company behind for the new owners to keep. Given that equity stakes in other publicly traded companies are really just as good as cash -- heck, maybe even better -- it makes sense to count this as part of the cash hoard for the purposes of determining what the actual economic price of a company is.
  - Given all of this, you can see that the real, economic purchase price of a company at any given moment is the value of the stock (the market capitalization), plus the debt that the company has taken on, minus any cash or investments it has on the books.
  - Enterprise Value = Market Capitalization + Long-term Debt - Cash & Investments
  - Why go to all of this trouble when some people argue that the value of the stock has already been adjusted for the debt and cash a company has? Because no matter how much the actual price of the stock changes, the debt and the cash do not go away. An acquirer still has to take on the debt and still gets to put the cash in the bank whether the company's stock is worth $1 billion or one dollar. Debt and cash are economic realities and must be factored into the purchase price an acquirer pays for a company. Enterprise value is not a valuation, meaning the theoretical price at which a company should trade, but a value, meaning the current, real price as definite as if stuck on with a pricing gun.
Fool.com: Joy of Free Cash Flow [Drip] February 28, 2002 on 2007-06-27
- We celebrate free cash flow (FCF) all across The Motley Fool because it is the most important thing that a public company can accomplish. Lacking free cash flow, it's difficult for a business to pursue new opportunities, acquire other businesses, or pay dividends. When achieving free cash flow, a company is much more capable of those things plus paying down debt, saving cash for a rainy year, and building shareholder equity. So, what exactly is free cash flow?
- FCF = Operating Cash Flow (OCF) - Capital Expenditures
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- - You can find a company's cash flow statement in its SEC files, available from Fool Quotes & Data.
  - To see a quarter's results, you need to use simple math. For example, you need to subtract the second quarter's cash flow numbers from the third quarter's to see the third quarter's results alone. Using Johnson & Johnson (NYSE: JNJ), here's an example:
    Q3 2001 Cash Flow Statement
    OCF………………….............$6.068 billion
    Capital expenditures…....$978 million
    FCF………………….............$5.090 billion
    
    Q2 2001 Cash Flow Statement
    OCF………………….............$3.926 billion
    Capital expenditures…....$571 million
    FCF………………….............$3.355 billion
    
    Q3's FCF……………..... ....$1.735 billion
  - For example, you should deduct tax benefits from stock options from operating cash flow because it isn't a true gain from operations.
  - If a company lists its tax benefits from stock options on its cash flow statement your work is easy (and all companies should, just as eBay (Nasdaq: EBAY) does since the Fool's Brian Lund called them on it). Unfortunately, most companies don't list it, so you'll need to scour the financials for the right tax benefits figure to deduct from operating cash flow.
  - However, when you're ready, hunt down the dragons, especially tax benefits from stock options, to arrive at refined free cash flow. Then start tracking it at your companies.
  - The EV/FCF ratio is much more reliable (and meaningful) than the P/E, which is often distorted. J&J's P/E is around 30.
Securitization Simplified on 2007-06-27
- Glad you asked. Let's start with the basics of securitization, which is probably one of the most important developments in the financial world. Securitization, as you might have guessed, happens when you take a pool of assets that earn interest, like car loans, mortgages, or credit card debt, and package it into securities.
- For example, Wall Street might take $800 million worth of credit card debt from 80,000 different people and package that into credit card asset backed securities (ABS). Whoever invests in this ABS gets paid dividends from the credit card borrowers as they pay their interest and principal. Wall Street gets a fee for overseeing this whole process, and the investor gets a yield-earning asset. Nice! For the most part, the credit card borrowers have no idea of what's going on, as long as they keep making their payments.
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- - Standardization is one of the main advantages of securitization. It'd be too much of a hassle to go to the supermarket and buy individual eggs. Instead, farmers package them into cartons of 12. Similarly, investors who seek a nice yield don't want to go out and make individual auto loans to Bob, Billy, and Nancy. It's much more convenient to buy a slice of a prepackaged pool of loans.
  - This is much different than investing in, let's say, Home Depot bonds, where a very deep and prolonged housing downturn might expose a concentration of credit risk.
  - Examples
    Suppose for some reason I have $1 billion worth of junk bonds. A lot of institutional investors -- like banks, insurance companies, and pension funds -- aren't allowed (or don't have the appetite) to invest in non-investment grade bonds because they are deemed too risky.
    
    However, these institutional investors control the big money, and not being able to sell to them is a like not being able to sell alcohol to people between the ages of 21 and 31. It sharply reduces the pool of possible customers.
    
    However, if I repackage these junk bonds into different classes, where I sell, let's say, $800 million worth of securities (thus repackaging them into a CDO), but I pledge all $1 billion, then those securities are now overcollateralized (their collateral value of $1 billion is $200 million more than the $800 million of the CDO securities sold). Because of the $200 million cushion, that $800 million in CDO securities is very safe and can earn an AAA rating from Moody's or S&P, and this lets me sell them to institutional investors.
  - As you can see, securitization greatly expands the market for assets that, on an individual basis, are very difficult to sell. An individual auto loan or mortgage is very illiquid; once securitized, it becomes much more marketable.
  - Nowadays, loan originators can originate loans and sell them to Wall Street securitizers for a gain on sale or securitize the loans themselves. That also means the originator often isn't the ultimate bearer of the credit risk.
  - If the originator knows he can get rid of the loan, this might be an incentive to push for higher volumes at less disciplined underwriting standards -- a practice that greatly contributed to the subprime meltdown.
  - The key here is that Capital One only retains a tiny portion of the ABS, so its credit risk is basically gone. This frees up its equity so it can go out and make more credit card loans and then securitize them again. Each time Capital One securitizes loans, it gets the rights to more residual cash flow.
Nicolas Darvas - Wikipedia, the free encyclopedia on 2007-06-22
- During his off hours as a dancer, he had read some 200 books on the market and the great speculators, spent eight hours a day until saturated^[2]. He began his studies by reading the following^[3]:
Toby Crabel - Wikipedia, the free encyclopedia on 2007-06-22
- short-term price patterns
- He currently manages private client funds though the offshore "Crabel Futures Fund" based on the British Virgin Islands. and The Crabel Limited Partnership for USA clients. The current assets under management are over $3.2B.^[7] Crabel manages all this funds with a staff of no more than 80 people,[5] including 31 researchers and 28 traders.[6]
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- - oby subscribes to Ayn Rand's Objectivism philosophy and owns an extensive Romantic realism art collection.^[8]
Steven A. Cohen - Wikipedia, the free encyclopedia on 2007-06-22
- After Wharton, Cohen got a Wall Street job as a junior trader in the options arbitrage department
- On his first day on the job, he made an $8,000 profit, and eventually was making around $100,000 a day for the company.
Henry Blodget - Wikipedia, the free encyclopedia on 2007-06-22
- In 1994, Blodget joined the corporate finance training program at Prudential Securities
Gil Blake - Wikipedia, the free encyclopedia on 2007-06-22
- investment strategy known as mutual fund market timing, a method of investing based on the historic pricing patterns of mutual funds.
- U.S. Trading Championships
Bernard Baruch - Wikipedia, the free encyclopedia on 2007-06-22
- n 1881 the family moved to New York City, and Bernard Baruch graduated from the City College of New York eight years later. He eventually became a broker and then a partner in the firm of A. Housman and Company. With his earnings and commissions he bought a seat on the New York Stock Exchange for $18,000. There he amassed a fortune before the age of thirty via speculation in the sugar market. In 1903 he had his own brokerage firm and had gained the reputation of "The Lone Wolf on Wall Street" because of his refusal to join any other financial house. By 1910, he had become one of Wall Street's financial leaders.
Tom Baldwin (trader) - Wikipedia, the free encyclopedia on 2007-06-22
- His preferred instrument to trade is the 30-year bond in the pits of the Chicago Board of Trade

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