Capital Markets Spring 2020
More than Meets the Eye Valuation
I • The stock market looks cheaper on free cash flow than earnings ‒ Companies’ increasing investment in intangible assets (e.g., R&D), that are expensed rather than capitalized, has depressed earnings relative to free cash flow
S&P 500 Valuation Relative to Past 25-Year Median
Better free cash flow generation makes stocks look cheaper on that metric than earnings
Price-to-Free Cash Flow
Source: FactSet as of 3/31/2020. Note: Price-to-earnings is the current market price of a company divided by its last 12 months of earnings. Price-to-free cash flow is the current price of a company divided by its last 12 months of free cash flow.
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