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Why Cheniere Energy Partners' Earnings Are Outstanding

http://www.fool.com/investing/general/2011/09/14/why-cheniere-energy-partners-earnings-are-outstan.aspx

Seth Jayson
September 14, 2011

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow (FCF) once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That’s what we do with this series. Today, we’re checking in on Cheniere Energy Partners (AMEX: CQP  ) , whose recent revenue and earnings are plotted below.

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Cheniere Energy Partners generated $32.2 million cash while it booked a net loss of $20.9 million. That means it turned 11.2% of its revenue into FCF. That sounds pretty impressive. Since a single-company snapshot doesn’t offer much context, it always pays to compare that figure to sector and industry peers and competitors, to see how your business stacks up.

Company

TTM Revenue

TTM FCF

TTM FCF Margin

Cheniere Energy Partners

$287

$32

11.2%

Chevron (NYSE: CVX  )

$216,898

$13,232

6.1%

ConocoPhillips (NYSE: COP  )

$210,762

$7,293

3.5%

BP (NYSE: BP  )

$337,410

($10,500)

(3.1%)

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. TTM = trailing 12 months.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An