Jim, I think you need to understand a little about the dynamics of business. If markets are saturated a frequently used stratagem is to increase market share at the expense of your competitor. Since some competitors are apparently jugged up with inventory this may be a reasonable thing to do. Yes, you sacrifice profits now for future profits. You do this when your analysis indicates that the increase in future profits more than offsets the decrease in current profits. You don't do this if there is no benefit.
Now, someone else pointed out that Compaq's margins are 7% higher than Dell's. That is an illusion, and to understand why you have to understand accounting inventory conventions. When you account for inventory on a LIFO system you treat the last item you bought as the first expensed item. Here's an example: suppose you bought two identical hard drives. The first cost you $300 and the second cost you $200. You sold only one and carried the remaining drive in inventory. So, you would expense $200 and show an inventory of $300. Now, when Compaq reports that they are jugged up with inventory, the inventory they are showing on their books is the oldest, most expensive inventory they have, and the cost they show is associated with the newest, least costly component in their inventory. That's true of every component in the system. The result is that profits tend to be overstated. That is the inevitable outcome of LIFO inventory accounting when prices are falling.
Dell doesn't have any inventory to speak of, so LIFO vs. FIFO inventory accounting isn't an issue. Cost tends to match the actual box that is shipped to the customer.
Now, given your mindset, it would seem to me that the most logical shorts would be the companies most likely to suffer if your scenario comes to pass. The logical candidates would be the ones with the greatest amount of old inventory. Since Dell doesn't have this problem your preoccupation with Dell is puzzling.
Paul |
