PCM Supporting ImageOUR MISSION: Preserve our clients' capital and produce consistent appreciation in our clients' assets.

PCM Services

INVESTMENT APPROACH

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Step 2

Confirming undiscovered value through rigorous financial analysis, focusing on "discretionary cash flow."

Once potential investments have been identified, the real work is only beginning:

  • Companies are subjected to exhaustive financial analysis to assess the nature and extent of the business's true, intrinsic economic value and its ability to sustain growth into the future, and
  • PCM's research focuses heavily on quantifying a company's discretionary cash flow - the cash generated from operations less the capital expenditures and other investments that are necessary to sustain and grow the business.

Why do we focus on discretionary cash flow?

  • It is a superior measure to earnings per share, the indicator typically used by many analysts, and
  • Reported earnings per share can be artificially inflated; discretionary cash flow as we calculate it is more certain.

Most importantly, companies use discretionary or free cash flow to accomplish a number of goals, all of which may increase shareholder value. Companies may:

  • Buy back stock,
  • Pay down debt,
  • Pay dividends to shareholders, and
  • Buy new businesses that enhance the overall value and strategic strength of the company.

Rather than buying "stock," we approach the investment process as though our intent is to acquire the entire company. This commitment to "acquisition due diligence" takes us through the target company's business fundamentals, necessitates detailed scrutiny of the reported financial statements, requires us to understand the quality of management and the nature of corporate governance, and ultimately involves the determination of a specific value for the entire business.

Our research-driven, value-oriented approach is driven by straightforward concepts:

  • Financial accounting practices allow for substantial fungibility of reported earnings, whereas cash earnings and free cash flow can be quantified absolutely.
  • The function of a business enterprise is to generate free cash flow for its owners.
  • A business is worth the net present value of future free cash flows with a discount factor adjusted for the risks inherent in the business.
  • Management's competence, agenda and incentives will materially impact the outcome.