Dissecting Niles and Bank Boston [Who do you think brokered CPQ/DEC deal?]
Votarire:
Patsy Wilson a lurker on SI and long time Dell shareholder sent this from the Fool thread,quite intriguing,No?
It is a rather lengthy post so just skip the portion that seems irrelevant.
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From the Fool thread.
Stocks D / Dell Computer Corporation (DELL)
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Subject: Dell and the 'Big Picture' Date: 2/14/99 5:28 AM
Author: BruceBrown Number: of 22562
Let's examine Daniel Niles (Bank Boston branch in San Francisco) and his Coverage & Rating for the PC industry and some related stocks - as well as investing in the PC related business in general. I have observed that Bank of Boston in general has not been too keen on the overall market in general since last April. They have positioned their sell side team out in the media's limelight at every opportune chance. Print, television and the Internet. It's fair to assume that the 'team' approach in these big houses work in tandem and the communication channels therein are quite well supported. We also know that BBRS does a lot of M&A work. Does anyone remember who brokered the Compaq - Digital deal?
Notice what the only strong buy in the box makers covered by Niles is - gee - Compaq at a strong buy. Of course it is! See below as to why Compaq is the 'King'. I'll go along with his rating on HP, although I sold out of HP a long time ago. He also rates Micron Electronics a buy! Good grief. I threw in Micron Technology's strong buy rating as well. Why? Is Bank Boston sweet on deals with Simplot and company? Worth knowing if one is an investor. I don't know the answer, but if I was going to invest in anything Micron related I would check it all out to see who's in bed with who. I can't argue with his strong buy rating on Intel and lower rating on AMD. That's a clear call for any analyst. However, the only stock from the list below to receive his lowest rating (market perform) is DELL. Interesting. He put this rating on Dell back in May of 98 even though it was the undisputed Prince in direct market execution. It had been lowered before that when concerns of the sub $1000 machine came into play back in 1997 (concerns of price competition having an adverse effect on profit margins - which is a valid concern). What has been the performance of Dell vs. Compaq in terms of shareholder return since 1997? After all, BBRS is just looking out for their clients - right? I guess they all made tons of money buying shares of Compaq and Micron. I'll admit - I bagged a double in Micron Electronics and cashed out as fast as possible. I'll also admit that I have a lot of shares of the king/prince structure of Compaq, Sun, Apple, Dell, Gateway and the gorillas Intel/Microsoft.
COMPAQ COMPUTER (CPQ), SBUY
DELL COMPUTER CORP (DELL), MP
HEWLETT PACKARD CO. (HWP), BUY
INTL BUSINESS MACHINES (IBM), LTA
MICRON ELECTRONICS INC (MUEI), BUY
SILICON GRAPHICS INC (SGI), BUY
SUN MICROSYSTEMS INC (SUNW), LTA
INTEL CORP (INTC), SBUY
ADVANCED MICRO DEVICES (AMD), LTA
MICRON TECHNOLOGY INC (MU), SBUY
We could dissect it all and find out the real reasons, but the bottom line is that these firms are just doing their 'work'. They have corporate relations to consider, client relations to consider and money to make to stay in business. We know they make it on the upside as well as on the downside. Niles has not been a bull on Dell for quite some time and he used his stance and influence to once again confirm his concerns on Friday morning before the opening bell. Yes, of course we were all upset since we are Dell shareholders. I took a huge hit, but I've got well over 4000 shares of Dell. Strange that they now like Dell at 80, but didn't like it all last year at any price. Hmmmmmmmmmmmmm. They also expect Dell to match the estimates on Tuesday - yet they keep the rating at a market perform.
I won't argue their rating on Compaq either, as it is the current 'King' in the PC business in terms of total market share. I would argue that Dell and Gateway are tke King and Prince of direct marketing in my portfolio. (This 'King and Prince' stuff comes from "The Gorilla Game" book.) They are all judged on execution and Dell is the clear winner in terms of the direct model execution. That point is as clear as a sunny day in California. I'm not sure if we should call Dell a Prince in the PC industry or divide it up and call it a King in the direct model section of the PC industry and a Prince in the entire industry. I bought it in 1995 for the direct model diversity in my portfolio. With the PC industries expected growth rate in Asia to go from 10 - 11 percent last year to 14 percent or higher for 1999, we have to believe the market looks healthy for Intel, Dell, Compaq and many others.
We could research all the brokerage houses and their 'team' approach to investing, but who has the time? That gets a little too difficult and involves a lot of second guessing. Investing in the good companies that have a proven track record and have a plan for future growth is the much better, less time consuming avenue to take. Dell fits that like a glove. Just keep in mind that these analysts and firms have their own methods and not to get too distracted by them. If some threat of substitution for the PC industry or the growth in the industry starts to slow or price competition starts to threaten the profit margins - then we sell the whole group and go on to our next investment. "The Gorilla Game" says this about holding Kings and Princes (and I quote from page 173-4; G. Moore, P. Johnson and T. Kippola):
'The CAPs (capital advantage period) of kings and princes are based primarily on execution advantages, with kings having the edge due to larger economies of scale. The primary difference between them is size, not position; princes can hope to dethrome kings, whereas chimps can virtually never dethrone gorillas. As a result, kings are much less secure investments than gorillas, while princes are almost on the same footing as kings.
Kings and princes are attractive investments because execution based advantages in a hypergrowth market can be formidable indeed, and often generate significantly long-lived CAPs. Upside surprises in revenues and earnings are just as accessible to kings as they are to gorillas. Moreover, in some gorilla games it is not clear until very late in the market's development whether the play for proprietary control will be won or lost. So it is not uncommon for a gorilla-game investor to find that a planned holding of gorillas and chimps has transformed itself into an actual holding of kings and princes. For all these reasons, kings and princes are part of the gorilla game. They just need to be handled carefully.
...........On an individual basis, we suggest you sell any of these companies if they stumble in the marketplace. On a category-wide basis, we suggest you sell off the entire collection as soon as the category's overall rate of revenue growth starts to decelerate. Following these rules, you will profit from the bloom of hypergrowth, probably give up some additional upside that you could have gotten by holding longer, and protect yourself against the inevitable loss in valuation once the lack of monopolistic barriers to entry permit price competition to erode profit margins.
Rule 6. Hold kings and princes lightly, selling individual stocks on a marketplace stumble and the category upon deceleration of hypergrowth.'
This is what Niles and all analysts are watching for - decelerating revenue growth and price competition eroding the profit margins in the PC industry. I can't blame him for those concerns. I think the industry agrees as a whole that the growth is still there for the PC industry. Why would Niles say Dell is good at 80? The entire industry as well as we investors are watching the king/prince game for exactly what the book points out in terms of decelerating revenue growth and how it affects profit margins. Looking at the 'big picture' as investors is such an important part of our homework and research. We don't always get it right, nor do the 'experts'. Need I tell you how 'burned' I am with my shares of Phillip Morris? From a valuation standpoint it all made such sense to me, but I wouldn't allow myself to step away from the 'big picture' of forces too strong outside of my control. Oh well, at least the dividends have been good.
My whole point is that we need to look at the numbers on Tuesday from Dell in terms of revenue growth, margins, growth and execution. I liked what I saw in my shares of Gateway, Compaq, Apple and from the 'bigger picture' Intel and Microsoft this past quarter. I think many of us felt that because these numbers were healthy in these other companies that we had no reason to believe Dell would be out of step with the rest. IBM was a little out of step on the PC side.
Keep an eye on the 'big picture' and know that these analysts and industry watchers are just doing their job. Question the timing of the report - yes. Question and find out if anyone benefitted from the timing of the report - yes. Question your investments in the 'big picture' and find out as much about the gorilla/chimp/king/prince structure in the high tech industry - yes. Doing this certainly is a way - as a long term investor - to profit and accumulate wealth. Every investor owes it to themselves to spend a few hours a week doing some research to at least know why they bought shares of Dell, Intuit, Compaq, Intel, Microsoft, Coke, Gillette, EMC, Cisco or whatever. To say 'I bought it because everyone else is and they all have made money' is really a non healthy approach to your long term investing. Then you will find yourself asking the question we have all seen way too often on many stock boards 'I bought in at 110 - what happened?'. If you don't have the time to read up, learn and investigate your investments and understand the reasons for investing in each and every company you pick - it's best to let somebody else do it for you.
BB
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