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EBITDA Fine for Valuing Coca-Cola Enterprises Until Investors Change the Game

Also, Diamond Tech's response and an update on Genesis Microchip.

One of this column's favorite themes is that earnings before interest, taxes, depreciation and amortization is overused by a growing number of companies when there isn't much in the way of growth in


earnings. They argue, among other things, that EBITDA, or what they often refer to as cash flow, is a better way to value a company because cash can be used to make acquisitions that will generate even more cash flow.

Coca-Cola Enterprises


goes so far as to say, in its 10-K: "In the opinion of management, cash operating profit (or EBITDA) is one of the key standards for measuring our operating performance."

Can you blame them? At 111-times this year's expected earnings, it would probably be hard for almost any analysis to justify CCE's stock price, even when taking into account the stock's recent slide. (We're not talking high-tech here; we're talking capital-intensive soft drink bottler.) But at 10-times EBITDA? Hey, it's never been cheaper!

Maybe it hasn't. But what happens if one day investors suddenly decide that they don't want to buy the "value us as an EBITDA" story anymore, and start demanding a return on their investment? What happens if they start demanding that some of that cash flow, which supposedly is piling up, should be tossed


way? And what happens if they decide it's time to see some good, old-fashioned earnings?

That just may be what's behind the flat performance of CCE and other bottlers. Or so says

Banc of America Securities

analyst David Goldman, whose gutsy report on the topic is likely to cause the tempers of industry insiders to fizz. According to Goldman, while some of the decline in bottling stocks may be due to industry fundamentals, it may also reflect a change in the way rollups -- or industry consolidators -- are being valued. And if so, he says, "It means the scholarly view of EBITDA is moot. It means if an investor doesn't buy into it, he's out of there."

Which he believes is just what's happening at Coca-Cola Enterprises and even newly public

Pepsi Bottling Group


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. But at least give Pepsi Bottling this: Unlike Coca-Cola Enterprises, it tells investors in its original


registration filing that EBITDA "should not be considered an alternative to net income or any other measure of performance required by GAAP, and should be read in conjunction with the Combined Statements of Cash Flows contained in the Combined Financial Statements ..."

Maybe Pepsi Bottling knows what Goldman does: That investors are becoming "impatient" with the promise of future cash flow, as opposed to returns today. "You can only use EBITDA for a finite period of time," he says, and Coca-Cola Enterprises "has used it for more than a decade."

Sooner or later investors expect their patience to pay off; as acquisitions wind down, shareholders expect the company to start doing things to enhance shareholder value. Unfortunately for Coca-Cola Enterprises, Goldman points out, capital spending is rising faster than cash flow.

Coca-Cola Enterprises officials did not return my call.

Short Positions

Diamond responds:

Yesterday's item on

Diamond Technology Partners


pointed out how the company's receivables have been rising, how its cash flow from operations has been falling and how one of its competitors was recently acquired at a price well below Diamond's public valuation. At the time, Diamond's Prez, Michael Mikolajczyk, hadn't returned my call.

But he did yesterday, and his side of the story: The higher receivables reflect the acquisition of a company that didn't collect receivables the way Diamond does. If the acquisition hadn't been done, he says, Diamond's days outstanding of receivables would've fallen to 30 days from 37 days. As is, it came in at 36 days, which he says is well below the industry average of 65 to 100 days.

Negative cash flow: The result of the company paying out cash bonuses in the June quarter.

And Diamond's valuation vs. that of

Mitchell Madison Group

, which was acquired by



: "I can't comment on a private company," because he doesn't know its numbers. He then ticked off Diamond's attributes, including its growth rate, revenue per professional and turnover rate, and said, "My sense is we have a proper valuation of a company with those metrics." Yesterday Diamond, in fact, rose 3 7/8 to close at 46.

To which the short-seller quoted here Friday says:

Superior Consultant Holdings


, another public consultant company, offered similar explanations when its stock was in the 40s. Yesterday it closed at 21 1/2.

The genesis of a story:

Genesis Microchip


, whose chips are used in flat-panel PC screens, has been a favorite of some mutual funds lately. But they had better pay attention. Genesis fan Jonathan Joseph of

Salomon Smith Barney

last week warned that this quarter's revs could come in 1% to 2% below his expectations. While the flat-panel display market remains tight, he said "new competitors are increasing their presence in the market over the next several quarters."

He then said the company remains "comfortable" with his earnings estimates, which haven't changed.

So, I asked

Mark Martinez

, my assistant, to see if the company agreed with Joseph's analysis. He called CFO Eric Erdman, who refused to discuss the quarter, citing the so-called "quiet" period.

"So, then I asked him if he was comfortable with the estimates." Mark says. "I told him about the note Solly put out on Friday. He said he couldn't talk about the numbers. I said, 'Well, on Friday someone from your company sure said that they were comfortable with the numbers. So, are you saying that you are now not willing to say that you are still comfortable?' He then went on the record and said "we are comfortable with the numbers."

What about the competitive landscape? He says it hasn't changed, but noted that there are a few other start-ups.

Start-ups, huh? Leave it to them to ruin the party.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.