A Mantra for Valuing Cash-Generating Assets
- We suggest the mantra “everything is a DCF model.” Whenever investors value a stake in a cash-generating asset, they should recognize they are using a discounted cash flow (DCF) model.
- This suggests a mindset that is very different from that of a speculator, who buys a stock in anticipation that it will go up without reference to its value.
- The topic deserves attention because many market participants don’t think DCF models are relevant, and many use heuristics for value without recognizing the purpose and limitations of the shorthands.
- The intrinsic value, determined by the present value of future cash flows, attracts the price like a magnetic force. This means it is useful for investors to keep in mind the value drivers of a discounted cash flow model.