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Author: dittyesq Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 468  
Subject: Re: newbie analysis Date: 12/27/2004 1:10 PM
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1. Is EV/FCF(ttm) supposed to show a value of a company like P/E?
and what would an undervalued stock's EV/FCF(ttm) ratio be?
2. I want to get in on this stock, how would i determine what is a good price? The current price is the lowest since February but the P/E is still over 50.


That's a fine start, k. No laughing will entail.

In a nutshell, you can summarize the situation this way: "great company, less-than-great price."

To address your questions, first, yes, you use EV/FCF just as you use P/E. What EV/FCF does is show a truer picture of the business's true value, by netting out cash and debt (EV) and focusing on real cash generation (FCF).

I'd say that if an EV/FCF is smaller than either the company's ROE or its five-year projected growth rate, then you may be looking at an undervalued stock. To give you some rough guidelines, Tom G is often willing to pay up to 20x an EV/FCF for a fast-grower. Personally, I've become more cautious after seeing how quickly a fast-grower like eSpeed or Select Comfort can get destroyed if growth slows by even a hair. I don't like to pay much more than 10x EV/FCF. Such stocks are often slower growers, but they do seem to hold up better after missteps. See: http://www.fool.com/news/commentary/2004/commentary04063003.htm

As for a good price on Lifeway, recall that in February, when I highlighted the stock here: http://www.fool.com/news/commentary/2004/commentary040209rs.htm, it was trading for a split-adjusted $7 a stub. The one analyst following Lifeway had it pegged at worth $9 by the end of 2004 (i.e., today). Right now, it's a little past that. However, in the interim, FCF has wobbled a lot, and it looks like that trouble may not be over with the impending milk cow killoff (see preceding post).

Personally, I'd not "back up the truck" yet at this price. But we are getting back towards a point where the stock will look attractive again.

Foolish regards,

Rich
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