POST OF THE DAY
l'union fait la force
Cash Flow Burn

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By TinkerShaw
July 6, 2001

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I've been talking a lot about telecom lately. Clearly an out of favor and depressed area of the world economy due to a very severe industry correction. A correction that will in the end make the industry healthy, leaner and more profitable and which will, and is, pushing the industry quicker to more optically intense solutions in the network.

Certainly for the long-term investor from these prices there is probably a lot of money to be made if you're patient and invest in a portfolio of likely-to-dominate companies upon the industry's return to growth.

But no one can say for sure how long this process will last. As such, this is a great time to compare cash flow burn. Here I have links to New Focus (NUFO), Avanex (AVNX), and (just because I hate them because they are the epitome of cash flow burn in a tail spin, yet for some reason their stock keeps going up... most probably because they are the last American fab and give the Street an awful lot of I-bank work) Micron (MU).
 
From these cash flow statements you can notice the very large and real difference between the capital intensity of these companies and their cash flow burn. Micron had over $2 billion in cash a quarter or two ago. It burned through over $700 million in the past 2 quarters, and it will need to continue to spend several hundred million dollars a quarter just to maintain itself in business. See the capital expenditure line in the cash flow link for Micron.

NUFO isn't nearly as bad off as Micron, but it is clearly more capital intensive than AVNX. AVNX, even during this slowdown, due to some minor capital financing, managed to actually increase its cash position.

In the end it is this cash that makes a company valuable. But it also demonstrates a company's ability to survive an industry shakeout. Avanex looks well positioned; they limited their capital expenditures to less than $4 million while still producing the same amount of product as they produced 2 quarters prior. NUFO may struggle if the slowdown is prolonged for an extended period going forward; their business model appears somewhat more capital intensive. Micron could, literally, find itself in the position of Hyundai (now Hynix) begging its government (us) for a Chrysler like bailout to stay in business.

But just for those thinking of investing in these market areas, there may be some real bargains that over time as the industry recovers may provide just extreme returns if the company returns to a stronger position during the recovery. However, before it has a chance of doing so it must survive. So make sure you thoroughly research the company's cash position, and the company's capital model before doing so.

Tinker