John,
<< Corrective actions may be under way for the US companies but what about the Japanese and Korean companies. The change in currencies gives them more incentive to cut prices and expand their markets. It could be a long time before this plays out. Like was said on the CC " it will take longer this time". The Koreans and Japanese may be part of the reason.>>
The above logic does not make economic sense to me and I am not implying any offense. US DD makers virtually operate in Asia with their plants and work-force being there. They have recognized the currency devaluation possibility and cheap labor force a long before others. Thus, cost-wise US DD makers will be very competitive with their Asian counter parts. [The reason for why SEG closed its Ireland operation is because of high cost of labor.]
NOW on Asian companies will be thwarted by a very significant CREDIT CRUNCH and COST OF CAPITAL HIKE, which will severely erode their artificial competitive edge. [IMF is charging 18% on bridge loans and is forcing Asian banks to raise interest rate.] Their competitive edge was artificial because of low rate government-sponsored bank loans and their access to global capital markets.*
(i) Now most SE Asian conglomerates have failed in their attempt to raise debt or equity in global markets.
(ii) Government-sponsorship is IMPOSSIBLE because the central banks are broke. Even high cost loans will be rationed!!
(iii) Asian companies are very highly leveraged, on average, 3:1 (debt:equity), as compared to 1:1 for US companies. In fact, Asian conglomerates are nearly 100% debt-financed. They are now facing margin calls. Which assets will they liquidate? Well, the DD maker Micropolis has already closed! The low/negative profit sectors will now be deeply on the negative side given a significant increase in the Asian COC. This will motivate the Asian conglomerates to cut such areas as DD. I am not sure that Hundyi (sp?) and Fujistu will contine their DD business any longer under the capital crunch.
But, DD will continue to be profitable for US companies since the COC here has remained low and will be so in the forseeable future. [My banker (Chase) advised me to not convert my floating-rate mortgage to a fixed rate, because he said he would bet money on the long-term rate going down.]
QNTM is well-poised to thrive and lead the DD sector. Its DLT business is unique. It is innovating new products. It has transitioned into MR heads.
What should be the value of DLT which is becoming the industry standard, has no virtual competition, and is earning approximately 35c per quarter growing at 10% per quarter in the forseeable future? Well, let's assume (conservatively) that the market required rate of return on investment in QNTM as ~24% per year (6% per quarter) and a quarterly rate of earnings growth from DLT as 5%. Then by the standard WS finance valuation model:
VALUE = EPS/(Expected Return - Growth Rate) = 0.35/(.06-.05) = $35.
You can see that if 24% expected return is lowered and/or the growth rate is increased, the value will explode. [The expected rate of return in the long-run will always be higher than the growth. Otherwise, you will have a money machine as I teach in my MBA classes.]
Remember that very little of DLT (if any) is sold in Asia. Its market is concentrated in the USA and Europe and QNTM cannot fulfill all the demand!!
How much should QNTM's DD be worth? Well, it should equal to at least the value of WDC because QNTM has no transition problem, QNTM has a better reputation, and it has other innovations on the pipeline. Today WDC closed at $15.25. Thus, QNTM should not be lower than $35+$15 = $50. [My previous guestimate for DLT posted here was extempore and ludicrously small.]
Those who are selling at current prices with the momentum, especially most fund managers, are really not applying their judgement, IMHO. Rationally, most of these fund managers are IDIOTS. Now they are getting out with momentum because of Asian Flu or Asian Contagion which positively (not adversely) affects US DD makers for the reasons described above. The fund managers will reenter when the price begins to rise. Most on SI stand to lose litte that way because of small trades. But, Fund managers land up paying much higher prices due to their market block orders or receive much lower prices due to large sell orders. [The MMs screw the panic sellers, reaping all profits. Remember the fat bonuses for WS Trading firms? True, one would like to sell if the future is bleak, but not because the herd is selling.]
That is why, fund managers under-perform (on average) as compared to a buy and hold strategy on S&P 500. Buying and holding an individual stock at random can be very risky, though, because one may lose all the money!! If anyone thinks QNTM is such a stock, then sell it by no means. But, QNTM is a far better, stable and leading company.
To conclude, what affected the DD makers was competition due to artificially low COC and cost of labor in Asia. While US DD makers were smart to take advantage of the Asian cheap labor, they could not get artificially low (government sponsored) loans.* Now this artificially cheap COC will be a dream in Asia, which will virtually force Asian DD companies to close. This is a boon to US DD makers and time to accumulate the shares of the leading DD maker QNTM. It is my opinion, not an investment advice.
Sankar
* I was talking to a Japanese friend from the Univ of Chicago who was consulting the BOJ, when I was working at the Board of Gov of Fed Res System as a Financial Economist. He described how backward the BOJ was; they do not have a division of research. The US FED system employs about 350 top economists, hired mostly from the top 5 US universities, and many of them have eventually earned nobel prizes. The US Finance system is second to none. It is not perfect, but there is no distant second. |
