Intrinsic Value Through Cash Flow Not Momentum

"I started to rely on a single powerful metric, almost like blood pressure in a human, that I thought could instantly, accurately reflect the health of a cable operator: cash flow. The shorthand for this metric would become known as EBITDA—“earnings before interest, taxes, depreciation, and amortization” (and pronounced “ee-bit-dah”). That is, earnings before we deducted all those expenses to lower our tax bill. Robust, tax-sheltered cash flow became the lifeblood for early cable operators, enabling them to manage big upfront capital and operating costs, service their debt, and invest in growth despite the long timelines often required to achieve profitability."

"I had always looked at the cable-TV business as being fundamentally different from other industries, and more akin to the real estate business, where you buy property and collect rent or lease payments in the form of monthly fees. It was obvious to me that if we were going to be measured on earnings, it would be real tough to stay in the cable industry and grow. We needed to promote a different metric to get investors interested."

"Now, in a lot of those deals, we focused hard on one measure: cash flow, or specifically, EBITDA (earnings before interest, taxes, depreciation, and amortization). It gives a clearer picture of operating performance and a firm’s ability to borrow or invest. Some people say I all but invented the term. I can’t swear to it, though it is true that I helped make it a whole new form of currency on Wall Street."

"Government tax laws gave cable companies a big advantage over phone companies: they could “depreciate” their systems quickly over a shorter life, treating the gradual loss of value in their equipment as an expense, even though it wasn’t an actual cash cost, with greater tax advantages. This accounting method reduced their reported earnings and, in turn, their taxes. On top of that, they could also deduct real cash expenses like interest payments before calculating taxable income, cutting their tax bills even more. So, when investors pointed out that TCI had high interest payments, big cable equipment budgets, and no earnings, I would point out that these accounting-based losses resulted in TCI hardly paying any taxes to the government. And as long as cable operators collected predictable “rent” in the form of monthly fees from customers, and they met interest payments and grew from acquisitions, the value of the company’s stock would increase."

"Intrinsic value is the present value of future cash flows."

"a private market intrinsic valuation for a Graham value investor requires that the asset generate free cash flow."

"Be motivated when you’re buying and selling securities by reference to intrinsic value instead of price momentum."