hpeace: looks like others starting to share your prediction of lower prices. Just makes good business sense. Big boys try to clobber all others during down cycles. From Microsoft Investor:
<<Rather than using the weakness in prices for memory chips and disk drives to pad their profits by a penny or two, Dell (DELL), Compaq (CPQ), and Hewlett-Packard (HWP) accelerate their price wars, slashing the price on their cheapest models from $1,000 to $800.
What is it with these companies? Don't they know that every CEO is scrambling to make earnings this quarter? Don't they know that their industries are in the down leg of a boom-and-bust cycle? What are they trying to do? Make it worse?
Exactly, said Richard Hoey, director of equity research at Dreyfus Corp, when I raised these questions with him. If his or her company is a low-cost producer with a strong balance sheet, a good CEO will try to make the bottom of the cycle as tough as possible for competitors: Add capacity. Spend more on R&D. Cut prices to the bone. Anything to drive the weak sisters to the wall. Then, rake in the profits when the industry cycle turns. With fewer competitors, more profits flow to the survivors. Play the game long enough and well enough, and a company can build an almost unassailable market position.
Do I need to come right out and say it, or is the implication clear enough? At a time like this, when industry after industry is awash in extra capacity, forget about earnings per share. In fact, throw out many of the measures that you use at other points in the business cycle. Look for companies increasing capital spending, throwing money at research and development, and breaking ground on money-losing plants. Look for companies that are aggressively using this time of troubles to wipe out as many competitors as they can. Buy the ruthless and the mean. These are the companies that will make you money when the cycle turns up.
Intel (INTC), for example, knows by now how to play this game in its sleep. Look at the details in the company's latest financial report, released last Tuesday. With revenue basically flat for the fourth quarter compared with the year-earlier period, income actually lower ($1.7 billion versus $1.9 billion), and margins projected to shrink to 55% from 59%, the company announced an increase in capital spending to $5.3 billion for 1998 from 1997's $4.5 billion. R&D will rise to $2.8 billion in 1998 from $2.3 billion.
All this while the company is cutting prices to keep competitors from gaining market share. Don't you think the execs at AMD sweat knowing that they have to execute perfectly in order to pick up ground?
You don't have to be in a high-technology industry to play the game, either. >>
George
Taken from
investor.msn.com |
