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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Night Writer who wrote (83787)	7/26/2000 10:18:44 PM
From: profile_14	Read Replies (2) \| Respond to of 97611

NW, Russ, Rudedog, CJ et. al. Re: Cash Conversion Cycle What needs to be understood is not so much that the cash conversion cycle for company A is X vs. Y for company B, but that as described earlier, certain product lines require specific amounts of working capital. It goes that the more expensive and complex products will require more working capital and vice versa. When analyzing each product line and determining product profitability, one should really use a discounted cash flow method to determine the free cash flow of each product line. The faster these product lines grow, the more cash they will consume. Ultimately this will affect product profitability because the cash will have to be borrowed at the Company's WACC (weighted average cost of capital) interest rate, which is the combination of the ROE (return on equity i.e., cost of equity) and the AFTER-TAX cost of debt on the balance sheet. When discounting the cash flows for these businesses, those with a larger cash conversion cycle will need proportionally more funds to continue operations if in a rapid growth mode (e.g., Wildfire) until a steady production cycle is reached. Planning for such cash flow requirements is necessary, but since Compaq is cash rich, it appears to be less of a necessity and more of an issue of how to allocate balance sheet assets and match their maturities with the liabilities so that funds are available at the time businesses need them for expansion. If Compaq is underleveraged, then it could be earning a sub-par return on its assets and equity. Part of Compaq's strategy to invest in new ventures and company partnerships is directed by its desire to create pull-through demand for its products. Secondarily, that strategy is also driven by its desire to earn a superior return on its investment. If only one of, say, 20 investments in such partnerships is successful, it will more than make up for the rest on a weighted average basis, and still leave Compaq with a rosy relationship from which to draw sales. Hence all of the nominal equity stakes that the firm has and the periodic sales of equity interests. Given some of the depressed internet prices of the last quarter it does not surprise me that Compaq only created a penny of investment income last quarter, when in it had done more in previous quarters. I've been gone for a while on vacation (San Diego) and will be going out of town again to El's neck-of-the-woods Michigan in another couple of weeks (Traverse City and Detroit suburbs), but wanted to draw everyone's attention not so much to the cycle, but to what the Firm can do to maximize its return to shareholders through cash management practices, hedging, etc. Regards,