Meaning of 10% cash-on-cash
I was reading through ValueAct's investor letter tonight. It states "At our £3.40 cost, we see Invensys
trading at roughly 10.5% forward cash-on-cash with a long runway for growth."
Is this some variation of FCF yield?
Here's the link. http://csinvesting.org/wp-content/uploads/2013/09/MSFT_ValueAct_ltr-Q1_13-MSFT.pdf
c/c = cash flow for that period (annual)/total cash invested
I believe it is (EBITDA - incremental working capital investment - incremental capex) over the EV. Some on this forum who have links to ValueAct may know better than I do.
captainkoolaid is right, pegasus33 is terribly wrong.
OP you are correct. It's unlevered FCF / TEV
"Cash-on-cash yield:Require a minimum of a 10% cash-on-cash yield, with cash-on-cash yield defined as pre-tax cash flow less actual capital expenditures divided by the corporate enterprise value."
http://vic.eroidev.com/the_congress/past_congress_highlights/2006/west/presentations/downloads/06VICW_Jeff_Ubben.pdf
Two Certified Users incorrect here? Damnnnnn, boys.
I think Pegasus and Nabooru are confused as to what ValueAct actually is...
I stand corrected. Nabooru seems to be correct in the context the OP was asking about.
Captain KoolAid and I were mistakenly answering the question as it relates to ValueAct's investment in said entity not the entity's cash on cash yield...
I probably should have been clearer in my post that I meant EBITDA less all WK movements less all capex movements (i.e. not using maintenance capex as some method of ignoring expansionary capex in the FCF calculation). This is pretty much a simple equivalent to the ValueAct definition without making adjustments for accounting fun (e.g. provision releases, gain on sale accounting). A lot of confusion in this thread unfortunately.
I stamd corrected but also think ValueAct's definition -- which is ****NOT**** how I've ever heard other HFs/PE shops define cash-on-cash -- is totally meaningless for a minority equity investor.
How so? They're still a minority equity holder in MSFT.
Because it doesnt tell you fuck all about what you are actually earning on your equity investment and you don't have any influence to change the capital structure
Fair enough. Thank you for the response. How do other HFs/PE shops define it?
Usually I don't want to call anyone out on their stupid comments, but this is 100% wrong. Anyone interested in being any type of equity investor, whether public or private, should ignore this guy.
KB is correct.
It looks like ValueAct is using this metric as a "screen" of sorts.
How... This is the definition of FCF yield that defines half of Greenblatt's main pillars of investing (the other being ROIC).
seriously it's also direct from valueact's presentation
ValueAct Capital's "Hedge": Buy good businesses at attractive valuations
Cash-on-cash yield:Require a minimum of a 10% cash-on-cash yield, with cash-on-cash yield defined as pre-tax cash flow less actual capital expenditures divided by the corporate enterprise value.
growth in cash flow - companies where the free cash flow from the core business is growing at double digit rates
discount to private market value - companies that are priced by the market at a discount of at least 40% to valuations of comparable private transactions
....
Why is unlevered FCF yield relevant for a minority equity investor?
Simple counterexample: Company A has a TEV of $100 and unlevered FCF of $10, with all $10 going to interest expense. This company has a 10% cash-on-cash yield (according to your/ValueAct's definition) and yet as an equity investor you see none of that. More troubling is that such a company is a good candidate for restructuring which would significantly dilute or wipe out the existing equity.
In the private space I've seen it just as @"captainkoolaid" described...very simply total cash you get out over total cash you put in, ie cash on cash...can't speak to how ValueAct is defining it, everyone has their own wacky definitions for things, although if you look at it from the perspective of buying the entire company then I can see how you might use EV when figuring out the cash in and exit value + dividends as cash out. Thinking more along the lines of MOIC.
http://www.macabacus.com/venture-capital/returns
//www.wallstreetoasis.com/forums/moic-vs-irr-interview-question
Fine, it has unlevered FCF of 5 and interest expense of 5, so now the interest rate is only 5pct. My point is the definition, in my opinion, is fundamentally mixing equity and total valuation metrics. Equally meaningless as valuing a company on After-Tax Earnings/TEV.
I agree with mrb87 on the technicality here, but I think the point ValueAct is trying to make is that they think about their minority investments as if they were buying the whole company. Fits with their activism and general approach to investing. But he is right that if a company is highly levered it can have internal returns that are very different from what an external minority would see.
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