Capital Markets Summer 2020

VI

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

II

S&P 500 Valuation Relative to Past 25-Year Median

21%

III

Better free cash flow generation makes stocks look cheaper on that metric than earnings

IV

-5%

V

Price-to-Earnings

Price-to-Free Cash Flow

VI

Source: FactSet as of 6/30/2020. 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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