Applied Materials No-Politics Thread (AMAT) Message Board

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Technology Stocks : Applied Materials No-Politics Thread (AMAT)

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Nov 20 3:59 PM EST

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To: Steve Lee who wrote (2762)	8/30/2002 11:24:52 AM
From: robert b furman	Read Replies (1) of 25522

HI Steve, I can speak with much experience regarding a market that has more supply than demand. Over my 14 years of owning a GM dealership - many market shifts have caught me overstocked in either new and/or used vehicles. When that happens - usually your competition is in the same condition.So everyone cuts grosses just to stop the bleeding. Key to this condition is not production capacity - rather the most important aspect is the existing inventory.It is the inventory that costs floorplan money or is depreciating monthly as in used cars. The manufacturers,in an effort to keep their plants running increase rebates ( a form of dropping the selling price) to move out the old existing product - which further depresses the value of used vehicles.The pain cascades down into areas beyond the original oversupply item. Key to a return of margins is eliminating the oversupply of existing inventory. Once the urgency to eliminate the excess inventory is accomplished - historical margins return.Just the return of historical margins is the big profitability change.A return to normal profits. Now ,if new lowered production equals demand - normal margins and hopefully profits will result. Growth compounded on top of normal margins bring about record profits. I think the key here is low inventories. This is only accomplished by sales rates exceeding production.This is almost always accomplished by severe margin slashing. If we are at breakeven to low profits with inventories at historical lows - then we are at the threshold of normal margins returning. I think normal margins returning at a lower level of production will turn out to be surprisingly profitable as most companies have reorganized the size of their companies structure and overhead. Most important is that inventories have been reduced. Going thru that trauma - results in very slow and hesitant management decisions regarding bumping up production rates. In fact, I'd be willing to venture that before it is all over - many will create a shortage environment and excessive margins to play a little catch up. It will be blamed on the lack of investment during the popping of the bubble years 00,01 and 02. I think we're thru the worst and many will be surprised how lean companies can generate good profits on a much lower level of production. JMHO Bob

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