{"id":22074,"date":"2023-09-25T17:55:54","date_gmt":"2023-09-25T17:55:54","guid":{"rendered":"https:\/\/microloannexus.com\/investing\/free-cash-flow-yield-is-flat-through-8-15-23\/"},"modified":"2023-09-25T17:55:55","modified_gmt":"2023-09-25T17:55:55","slug":"free-cash-flow-yield-is-flat-through-8-15-23","status":"publish","type":"post","link":"https:\/\/microloannexus.com\/?p=22074","title":{"rendered":"Free Cash Flow Yield Is Flat Through 8\/15\/23"},"content":{"rendered":"
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The NC 2000\u2019s free cash flow (FCF) yield changed very little in 2Q23 and remains well above its long-term average and at its highest levels since 9\/30\/14.<\/p>\n

At the sector level, however, there are mixed signals. Six sectors saw FCF yields go up while five saw them decline \u2013 and to varying degrees.<\/p>\n

Over the last several quarters, I\u2019m seeing a clear trend that the NC 2000\u2019s FCF yield looks to be topping out, which reflects, in my opinion, how outside of the few stocks driving the major indices higher, the rest of the market is struggling.<\/p>\n

This report is an abridged version of All Cap Index & Sectors: Free Cash Flow Yield Is Flat Through 8\/15\/23, one of my quarterly reports on fundamental market and sector trends. I calculate these metrics based on S&P Global\u2019s (SPGI) methodology, which sums up the individual NC 2000 constituent values for free cash flow and enterprise value before using them to calculate the metrics. I call this the \u201cAggregate\u201d methodology. My research is based on the latest audited financial data, which is the 2Q23 10-Q in most cases. Price data is as of 8\/15\/23.<\/p>\n

NC 2000 Trailing FCF Yield Remains Flat in 2Q23<\/strong><\/h3>\n

The FCF Yield for the NC 2000 from December 1998 through 8\/15\/23. The full report provides the same details on FCF and Enterprise value for the NC 2000 and each of its eleven sectors.<\/p>\n

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Only six S&P 500 sectors saw an increase in trailing FCF yield from 6\/30\/23 to 8\/15\/23.<\/p>\n

Key Details on Select NC 2000 Sectors<\/strong><\/h3>\n

Investors are getting the highest FCF for their investment dollar in the Energy sector as of 8\/15\/23. On the flip side, the Utilities sector currently has the lowest trailing FCF yield of all NC 2000 sectors.<\/p>\n

The Consumer Cyclicals, Real Estate, Utilities, Technology, Industrials, and Consumer Non-cyclicals sectors each saw an increase in trailing FCF yield from 6\/30\/23 to 8\/15\/23.<\/p>\n

Below, I analyze the Healthcare sector’s trailing FCF yield.<\/p>\n

Sample Sector Analysis: Healthcare<\/strong><\/p>\n

Figure 1 shows the trailing FCF yield for the Healthcare sector fell from 2.3% as of 6\/30\/23 to 2.1% as of 8\/15\/23. The Healthcare sector\u2019s FCF fell from $148.6 billion in 1Q23 to $138.2 billion in 2Q23, while enterprise value rose from $6.60 trillion as of 6\/30\/23 to $6.66 trillion as of 8\/15\/23.<\/p>\n

The full version of the report has these charts for every sector.<\/p>\n

Figure 1: Healthcare Trailing FCF Yield: Dec 1998 \u2013 8\/15\/23<\/strong><\/p>\n

The August 15, 2023 measurement period uses price data as of that date and incorporates the financial data from 2Q23 10-Qs, as this is the earliest date for which all of the 2Q23 10-Qs for the NC 2000 constituents were available.<\/p>\n

Figure 2 compares the trends in FCF and enterprise value for the Healthcare sector since 1998. I sum up the individual NC 2000\/sector constituent values for free cash flow and enterprise value. I call this approach the \u201cAggregate\u201d methodology, and it matches S&P Global\u2019s (SPGI) methodology for these calculations.<\/p>\n

Figure 2: Healthcare FCF & Enterprise Value: Dec 1998 \u2013 8\/15\/23<\/strong><\/p>\n

The August 15, 2023 measurement period uses price data as of that date and incorporates the financial data from 2Q23 10-Qs, as this is the earliest date for which all of the 2Q23 10-Qs for the NC 2000 constituents were available.<\/p>\n

The Aggregate methodology provides a straightforward look at the entire NC 2000\/sector, regardless of market cap or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.<\/p>\n

For additional perspective, I compare the Aggregate method for free cash flow with two other market-weighted methodologies. Each method has its pros and cons, which are detailed in the Appendix.<\/p>\n

Figure 3 compares these three methods for calculating the Healthcare sector\u2019s trailing FCF yields.<\/p>\n

Figure 3: Healthcare Trailing FCF Yield Methodologies Compared: Dec 1998 \u2013 8\/15\/23<\/strong><\/p>\n

The August 15, 2023 measurement period uses price data as of that date and incorporates the financial data from 2Q23 10-Qs, as this is the earliest date for which all of the 2Q23 10-Qs for the NC 2000 constituents were available.<\/p>\n

Disclosure: David Trainer, Kyle Guske II, Italo Mendon\u00e7a, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.<\/em><\/p>\n

Appendix: Analyzing Trailing FCF Yield with Different Weighting Methodologies<\/strong><\/h3>\n

I derive the metrics above by summing the individual NC 2000\/sector constituent values for free cash flow and enterprise value to calculate trailing FCF yield. I call this approach the \u201cAggregate\u201d methodology.<\/p>\n

The Aggregate methodology provides a straightforward look at the entire NC 2000\/sector, regardless of market cap or index weighting, and matches how S&P Global (SPGI) calculates metrics for the S&P 500.<\/p>\n

For additional perspective, I compare the Aggregate method for free cash flow with two other market-weighted methodologies. These market-weighted methodologies add more value for ratios that do not include market values, e.g. ROIC and its drivers, but I include them here, nonetheless, for comparison:<\/p>\n

Market-weighted metrics<\/strong> \u2013 calculated by market-cap-weighting the trailing FCF yield for the individual companies relative to their sector or the overall NC 2000in each period. Details:<\/p>\n

    \n
  1. Company weight equals the company\u2019s market cap divided by the market cap of the NC 2000\/ its sector<\/li>\n
  2. I multiply each company\u2019s trailing FCF yield by its weight<\/li>\n
  3. NC 2000\/Sector trailing FCF yield equals the sum of the weighted trailing FCF yields for all the companies in NC 2000\/sector<\/li>\n<\/ol>\n

    Market-weighted drivers<\/strong> \u2013 calculated by market-cap-weighting the FCF and enterprise value for the individual companies in each sector in each period. Details:<\/p>\n

      \n
    1. Company weight equals the company\u2019s market cap divided by the market cap of the NC 2000\/ its sector<\/li>\n
    2. I multiply each company\u2019s free cash flow and enterprise value by its weight<\/li>\n
    3. I sum the weighted FCF and weighted enterprise value for each company in the NC 2000\/each sector to determine each sector\u2019s weighted FCF and weighted enterprise value<\/li>\n
    4. NC 2000\/Sector trailing FCF yield equals weighted NC 2000\/sector FCF divided by weighted NC 2000\/sector enterprise value<\/li>\n<\/ol>\n

      Each methodology has its pros and cons, as outlined below:<\/p>\n

      Aggregate method<\/strong><\/p>\n

      Pros:<\/p>\n