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Strategies & Market Trends : Buffettology
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To: jhg_in_kc who wrote (373)9/25/1998 7:35:00 PM
From: Robert Douglas  Read Replies (2) of 4691
 
jhg,

Although normally I would never respond to such a sophomoric post as your mentor Chuzzlewit produced, I will give your sincerity the benefit of the doubt. If you are truly open minded to the valuation of Dell computer, I suggest you do a little more of the thinking on your own.

You seem to admire this Chuzzlewit greatly and so I doubt you will give much credence to my words. I doubt that anything I say will convince you, but let me say that I worked as an investment professional for almost 2 decades, I have been a security analyst and a portfolio manager. I have earned the designation CFA and know all the theoretical valuation models and their relevance in applying them to real life situations.

Chuzzlewit seems to find my logic "convoluted and incorrect " yet it was the most simple and straight-forward method of valuation there can possible be. How much more simple can it be to a) forecast future revenues b) forecast a future profit margin c) place a multiple on these earnings and arrive at a stock price? If this is convoluted thinking then the reader doesn't know even the basics of financial statement analysis and equity valuation.

In his post you mentor writes:

.His devils are the assumptions of contracting margins and increasing dilution.

And also on his projections:

These numbers assume no change in the number of shares o/s, and no change in margins.

So his only disagreement with me is that he projects no dilution in shares and no change in margins. Let's take these one at a time.

First no dilution. Are you telling me that Dell's policy is to grant no stock options to its employees? This would be a first and I can almost guarantee you this isn't so. Maybe Dell will buy back enough shares each year to offset this. Is this Dell's policy? Why don't you check into this? If you find out it is so then I will adjust my numbers. I would be surprised to see that a company growing as fast as Dell would use their cash flow to repurchase shares rather than expand.

Second profit margins. Here is where the rubber meets the road. I have done extensive studies on industries and companies during my career and it is my opinion that Dell's margins are at unsustainable levels. Why don't you look at what happened to their margins during the last 2 economic slowdowns. Isn't pretty is it? Of course you will argue that Dell is a different company today. Maybe, maybe not. Your mentor offers as his reason why profit margins will grow is that inventories will get better. I suggest if you believe this, that you sit down and put some numbers on the savings this could produce. I think you will be disappointed. I will stand by my prediction that Dell is a retailer of a cyclical product and that it is nearing its peak profit margins. If you want to study this yourself, why not research a few dozen industries and follow their margins over several economic cycles. I have done this time and time again.

You asked for my opinion and I graciously gave it. I have no position in Dell nor am I inclined to take one. Please do not be so rude as to have some unknown "expert" try and rebut my logic. I will not respond again. I feel strongly that your mentor has a closed mind and is dangerous to take advice from. He hurls insults way too easily to be trusted as an unbiased opinion. Why don't you do some thinking on your own?

-Robert

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