Sustainable Free Cash Flow Model
What is the Sustainable Free Cash Flow Model (SFCF)?
SFCF is a proprietary methodology developed Mr. Guttridge to analyze the probable distribution of a company’s free cash flow per share.
What makes the Sustainable Free Cash Flow Model unique?
- Original Filings – Because we’ve found the data to be error prone and inferior to the original primary data filed by companies with the Securities Exchange Commission (SEC), the SFCF looks only to original filings, never short-cutting the process with third-party data providers.
- Hands-on Construction – The SFCF process includes manually reconstructing a company’s balance sheet and income statement. This helps determine how a company’s value drivers have behaved historically and how these drives will most likely develop.
- Balance Sheet – By reconstructing and then studying the balance sheet, the SFCF minimizes the chances that capital intensity (the change in long-term assets as a percentage of sales) will be underestimated or asset productivity will be overestimated.
- Stock Price – Today’s stock price is a critical objective input to the SFCF because it can only be justified by the cash flow produced from certain combinations of value drivers. By deconstructing the market price, we are able to quantify the value drivers (subjective expectations) that are supporting that price.
- Management Control – The SFCF takes into consideration whether management has the ability to increase free cash flow per share and surpass market expectations.
- Management Compensation – The SFCF makes sure that management compensation is aligned with the goals that produce value.
Once each step of the SFCF is complete, GCM uses a Monte Carlo simulation to generate a range of probable free cash flow per share. We buy stocks whose prices are on the left-hand side of the generated distribution and sell stocks when the price reaches the right-hand side of the distribution.
How do we manage risk?
GCM minimizes the odds of a negative surprise by focusing on situations in which the expectations embedded in today’s price are dramatically lower than those warranted by a company’s operational track record.