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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (66567)	8/21/1999 4:11:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 132070

Mike, >>Wayne, Normal R&D is expensed. It is purchased R&D that is capitalized. This has always seemed to me like running in house expenses through the income statement and capitalizing outsourcing. Nutso, in other words.<< I know. I suspect that the point of the article about the new valuation model is that R&D should "not" be expensed at all. As a result, reported earnings would be higher. At least I've heard that view tossed around by other 'new era" types. My point was that in the handful of companies that I have examined with high R&D, the "new" earnings would not be so significantly higher as to justify the prices. Especially if you think about things on an aggregate basis, including companies with little R&D. The real question in my mind is what is the economic reality on "this specific issue" so we can value the companies properly. I think some percentage of R&D creates real assets even though they are not tangible and theoretically they should be capitalized. The difference and problem is that if I buy a building and equipment and it turns out to be mistake, I can usually sell them and recover something. Tons of money that is spent on drug, biotech, and computer R&D turns out to be a total unrecoverable waste. So capitalizing all R&D would be an error in my estimation. My guess is that most software purchased out of house has real value. (in progress R&D is another question mark) My overall view is that drug, software, and some other companies do have assets that exceed the tangible assets recorded. (and perhaps earnings) But a shift in accounting towards total capitalization of all R&D is an economic mistake and would not justify current stock prices anyway. Wayne

To: Knighty Tin who wrote (66567)	8/22/1999 12:08:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 132070

Mike, >>One bugaboo that has made me so negative on Micron over the years is that they have never had a nickle of free cash flow despite years of supposedly large eps. Every penny they "earn," plus more, goes into staying current in the business, with the result that debt and shares outstanding continuously expand. That means that without a friendly securities market, there is no company there.<< I agree that the "real" free cash flow levels are the main driver of value and that many companies don't have nearly as much as you would think based on reported EPS. (At least that's true of the ones I look at.) I would also argue that cash purchases of businesses (which are very common) are a form of capital spending. They are just buying the assets instead of building them. It might make sense for them to do so, but it's still cash going out the door that is contributing to the "future" growth of EPS and FCF and is not distributable now. So I would question the standard definition of: Earnings + Depreciation + Amortization of Goodwill - Capital Spending - Additions to Working Capital. I also agree that there are numerous businesses out there right now that are only still alive because it's so easy to raise equity. As soon as the climate turns bad they are in deep doodoo (is that a word?) Wayne