Great article! Have you considered changing the duration of the DCF? If ACT has a big moat, you could project onto 15 years before arriving at the terminal value. My second question: is the growth capex not linked to the fcf growth rate you assume?
Hey, that's an interesting idea I haven't entertained much yet. I'm not sure how to think about projecting valuation out over an even longer time horizon, but it might make sense for very durable businesses.
I agree that FCF growth rate is linked to growth CapEx in many cases, and of course you need to keep that in mind, but Owner Earnings represent more of a steady state metric. How much the business is capable of returning if it wanted to. It then is up to the capital allocation policy of the firm to decide if owner earnings are reinvested into organic growth (growth capex), M&A, capital return (dividends or buybacks) or debt reduction.
thanks for the article. I think Kevin has a good point on Growth Capex and FCF growth rate. How can we justify growht rate of FCF if no money is spent for growth capex? if i don't spend growth capex (i.e. i don't get more machinery, software), only reason why Cashflow grows is because i)i became more efficient with the same machinery, software ii) i can charge more for the same product.
Just my 2 cents...could be horribly wrong. thanks!
Absolutely, it might be worth it to dive into Growth CapEx specifically in a whole new post in the future. I'd say that it depends on the kind of growth capex too. For example, it is different if you need constant growth Capex or if you have large growth capex ramp up phases and then years of underinvestment (like TXN right now). Removing growth CapEx gives us a normalized earnings power in a steady state.
Great article! Have you considered changing the duration of the DCF? If ACT has a big moat, you could project onto 15 years before arriving at the terminal value. My second question: is the growth capex not linked to the fcf growth rate you assume?
Hey, that's an interesting idea I haven't entertained much yet. I'm not sure how to think about projecting valuation out over an even longer time horizon, but it might make sense for very durable businesses.
I agree that FCF growth rate is linked to growth CapEx in many cases, and of course you need to keep that in mind, but Owner Earnings represent more of a steady state metric. How much the business is capable of returning if it wanted to. It then is up to the capital allocation policy of the firm to decide if owner earnings are reinvested into organic growth (growth capex), M&A, capital return (dividends or buybacks) or debt reduction.
thanks for the article. I think Kevin has a good point on Growth Capex and FCF growth rate. How can we justify growht rate of FCF if no money is spent for growth capex? if i don't spend growth capex (i.e. i don't get more machinery, software), only reason why Cashflow grows is because i)i became more efficient with the same machinery, software ii) i can charge more for the same product.
Just my 2 cents...could be horribly wrong. thanks!
Absolutely, it might be worth it to dive into Growth CapEx specifically in a whole new post in the future. I'd say that it depends on the kind of growth capex too. For example, it is different if you need constant growth Capex or if you have large growth capex ramp up phases and then years of underinvestment (like TXN right now). Removing growth CapEx gives us a normalized earnings power in a steady state.
Thank you for the writeup! Will you be able to share the template with paying subscribers?
Yes! I looked it up right now and you apparently can easily share files in Substack posts. I'll prepare a post with the template for next week