Greenberg: Beware of Cash Flow Hype

More than 150 companies with market caps above $500 million that claim they have free cash flow—really don't!


That's the word from Ken Hackel, who wrote the just-published tome (and I do mean tome): "Security Valuation and Risk Analysis – Assessing Value in Investment Decision Making."

You should care, because free cash flow is the lifeblood of any company looking to grow.

And free cash flow was touted as a plus quite a bit in the recent round of earnings.

Hackel isn’t impressed. "The term 'free cash flow' has almost gotten to be like the old television show 'What's My Line',” he says. “What free cash flow should be defined as is the maximum amount of cash an entity could distribute to its shareholders without impairing its growth rate. Unfortunately, we've gotten quite a bit away from that."

The free cash flow definition most people use is operating cash flow minus capital spending.

But Hackel says that true free cash flow requires a lot more in the way of adjustments—the kind he believes most analysts simply do not do.

Among companies whose cash flow he believes are flashing red:

Kraft, whose revenues missed estimates and which didn’t include a cash flow statement with its earnings release or discuss it on its earnings call. Still, using available information, Hackel believes he was able to analyze the cash flow and say, “Their backs are really against the wall; they have no room for expansion; they do not have financial flexibility."

Kraft disagrees, saying that over the past few years it has made excellent progress improving free cash flow. "In 2010, there are a number of puts and takes in the equation, due to the acquisition of Cadbury. However, on a more normal run-rate basis, we would expect cash flow to be north of about $3.5 billion.”

Homebuilder DR Horton, which announces results later this week. He’s concerned that so much of its cash flow is built on the back of tax refunds.

UPS. Hackel notes that just today (Monday), the freight airline filed to issue bonds to help fund its pension plan. “Thus,” he says, “past cash flows were overstated, along with cost of capital and credit impact.”

But just as cash flow can flash red, it can also flash green. Examples:

Clorox. It reported disappointing results, but Hackel sees it as a very consistent generator of strong cash flow.

Lincoln Electric , whose strong free cash flow he believes will only get stronger.

Hackel's actually got a pretty long list of stocks he likes. Here’s a link, with caveat: The list could change with the filing of SEC docs or press releases that contain cash-flow-changing information. Further commentary on cash flow by Hackel can be found on his blog,

Questions? Comments? Write to

CNBC Data Pages: