Novell (NOVL) dirt cheap, good buy? Message Board

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Technology Stocks : Novell (NOVL) dirt cheap, good buy?

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To: Paul Fiondella who wrote (22510)	6/6/1998 1:33:00 PM
From: E_K_S	Read Replies (1) of 42771

Hi Paul - My back of the envelope calculation showed that Novell's free flow cash flow turned negative late last year. The biggest component that I add back into my numbers is the annual depreciation expense from their "owned" buildings. I am not too clear how they plan to handle the new San Jose facility construction accounting. I believe they will enter into a lease back contract on new construction built on their own land. They continue to own the land but I do not think they own the new buildings. Therefore, no depreciation expenses going forward for the San Jose main campus. The total cost of the new construction (all three phases) is estimated to be $350-$550 million. This project could reduce the depreciation expense by as much as $15 million per year or about $0.05 per share. In any case, the net impact is that depreciation expenses are reduced and the direct lease cost go up. Looking forward, the free flow cash flow will be reduced as the direct lease expenses will probably be higher (as they include an expense component for the cost of the new construction capital) than the savings in depreciation expenses. The cost of the new construction capital in the example above could be as much as $35 million per year or about $0.11 per share. Therefore, for this one project alone, once completed, the Free Flow Cash Flow would be reduced by $20 million per year. I always thought with an investment you wanted to (1) increase your cash flow, (2) build equity (3) and obtain a resonable rate of return on the capital invested. It appears that none of these factors are achieved for Novell. The only benefactor is the construction and finance company who will lock in a nice rate of return (for the use of their capital) at Novell's expense. Maybe the new CFO will re-evaluate the lease back contract. It seems to me that rather than doing a stock buy back, Novell should utilize their own capital to build the new San Jose facility rather than paying a premium rate of return to the developer and finance company. EKS P.S. I wonder if COB YOUNG has friends in the real estate developing business?

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