Declining Revenue Projections

When you do 2009/2010 projections with the Free Cash Flow Worksheet, many of your companies’ Revenue estimates will either show declines from 2008 or reflect much lower growth rates because of the current economic troubles. Please consider the following:

1) Make sure your OCFM projection is realistic. If Revenues are projected to decline, there’s a good chance the OCFM will also decrease.
2) Look closely at the projected ∆ Working Capital number(s). A decline in Revenues may reduce Working Capital, thereby increasing estimated Free Cash Flow per share. But a decline in Working Capital is not a sustainable long term source of investor return, so be careful. The longer your time horizon, the more you may want to consider adjusting the ∆ Working Capital estimate to a smaller negative number.
3) Same for projected declines in Capex. Many companies are cutting back on
Capex given lower consumer spending and prevailing uncertainties. Sooner or later Capex of most of these companies should return to previous levels.

In sum, a swing in the ∆ Working Capital number from a positive number to a projected negative number and a projected decline in Capex may combine to produce a higher than realistic estimated Free Cash Flow per share number.