Skeeter, thanks, but the problem is the market seems to dig the accounting model in a big way.
Put it this way. Two companies, Scamtron and Old School Inc. Same # of shares outstanding.
The next few years look like this:
EPS FY99 FY00 FY01 FY02
New School 1.00 1.40 1.96 2.74
Old School 1.00 1.20 1.44 1.73
Y/Y % ch.
Scamtron 40% 40% 40%
Old School 20% 20% 20%
Which company should be valued higher?
The accounting model would stop right there. Yeah, they'd throw in stuff to make it look like they're actually thinking, but for themostpart it stops right there.
How much net operating working capital and fixed assets are needed to generate that earnings growth?
If New School requires $10 in invested capital to generate $1 of earnings and Old School requires $5 for each $1 and the opportunity cost of capital is identical, then:
ROIC WACC Spread
New School 10% 12% -2%
Old School 20% 12% +8%
So New School is destroying value. And yet, they can't go out of business. So they turn to the markets for funds.
I guess if you want to take the tack that the markets are not that stupid, the rise in a stock like MU during a period of theorectical value destruction can be explained by the market's pricing in a new CAP or competitive advantage period - the period of time when a firm will be able to earn an abnormal spread above its opportunity cost of capital.
You could also take the tack that MU tends to rise when DRAM prices are rising and then does the opposite when they reverse and no one really gives a rats ass about ROIC, WACC, CAP <g>
The stuff I'm talking is only relevant when your actually trying to improve a firm's business. The accounting model schnooks on Wall Street are only in the business of improving their own firm's business.
Good trading,
Tom |
