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Technology Stocks : Creative Labs (CREAF)
CREAF 0.448-4.6%Dec 17 12:59 PM EST
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To: Douglas V. Fant who wrote (6518)12/5/1997 4:26:00 AM
From: Doug Fowler  Read Replies (1) of 13925
 
Doug:

There is some error in your logic that a 4.75 percent drop in sales would correspond to a 4.75 percent drop in profits (actually, 18 percent of 25 is 4.50).

The assumption is that all of Creative's costs are variable. Of course, cost of goods ARE variable, marketing expenses to some degree are variable (although much less so than cost of goods), employee costs are variable (but less flexible in a short period of time). Other costs, such as leases are not.

This means that a loss of 4.5 percent of sales can and usually does translate to a much higher percentage loss of profits.

In a worst case scenario, if you were to assume that the reduction in sales went completely to the bottom line, you could see a $0.50 percent shortfall in profits. I suspect the drop is closer to $0.20 or $0.25.

Still, using these assumptions, the numbers look quite good for Creative, and the current share price appears about $5 too low.

Doug
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