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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value
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To: Reginald Middleton who wrote ()1/25/1997 9:28:00 AM
From: Stratajema   of 102
 
Reg, very interesting presentation. I would like to toss out for discussion the *efficiency* aspect of R&D and advertising expenses of a company. Since the relative and comparative level of these expenses are a rudimentary part of your analysis and conclusions, I think *efficiency* should be a key topic.

For example, assume we have two *mature* companies (Company X and Y) who are entering the hot internet area. Company X has a smaller percentage of R&D and advertising expenditures than Company Y. However, Company X is more *efficient* than Company Y in reaching its targeted customer or developing products for its targeted customer. (In other words, Company X has their act together and knows what customers want as opposed to Company Y which guesses at what customers want and burns R&D money frivilously.) Let us say that 1 year in the future Company X's product prevails and produces returns while Company Y's product did not meet customer needs and does not sell well. If we were to use your approach to valuing these companies from *today's* viewpoint looking forward, would we not falsely assume that Company Y is more attractive?

IMHO, the efficiency aspect is most important in high technology companies where the environment is unpredictable and customers' needs change everyday. How often have we heard managers say (using nicely chosen words) that customers didn't like the products that they spent millions of dollars developing. Or managers who remark about how a huge advertising campaign missed the mark or worse yet backfired. (e.g. "This is not your father's Oldsmobile.")

As I look at semiconductor equipment companies today, I find many of them are allocating a large percentage of R&D money to further develop "yesterday's" technology and failing to anticipate Japanese competitors development efforts in the next generation of equipment. Given the high level of R&D and advertising expenses of many U.S. semiconductor equipment companies it would be difficult with your approach to see that they are inefficient with their R&D allocations.

Thanks for taking the time to share your thoughts. I believe in many aspects of your approach as long as a subjective, non-quantitative analysis is undertaken of a company.

Regards,
David
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