Portfolio manager Cale Smith on investing, Spoke Funds®, and Islamorada in the Florida Keys.

Hi Jeff,

In this case, 12% was just where I stopped walking the model down. Owner’s earnings have grown at about 110% a year the last three years, so wanted to be sure things were conservative. So, yep, I stopped at an arbitrary point, but a suitably conservative one. As I mentioned to the group in attendance, DCF’s are notoriously fickle, so can’t put too much emphasis on the results in and of themselves. It’s a hint, not an answer.

I use EBIT in general because I think it’s a better proxy for earnings power, and it’s just easier to scan a lot of companies quickly using EBIT than FCF….meaning easier to auto-plug into a spreadsheet, and it doesn’t vary year to year as much as most versions of FCF. Not the be all-end all, obviously, but I do use a variation of FCF (owner’s earnings) in the DCF should it come to that. So, will still pick up those Enrons. :) And, like you said, not a lot of qualitative difference between the two in TNDM’s case.

All data comes from 10-K’s. Buried in there, but worth digging it out…particularly to validate those network effects, ya know?

Hope that helps!

Cale

EBITDA adjusted for capital leases – (capex + relevant acquisitions)/Net Working Capital + Net Fixed Assets

Where in the denominator
Net working capital = (current assets – liquidity on hand + funds from sale of receivables) – (current liabilities – short term borrowings)

and

Net fixed assets = tangible fixed assets adjusted for use of operating leases & throughput agreements- construction in progress.