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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: the hube who wrote (39459)	2/17/2001 11:44:28 PM
From: tinkershaw	Respond to of 54805

For a company at the stage of WIND, I would think that you might also want to make an adjustment for R&D. WIND currently spends almost 20% of revenue on this item. John, with all the gorilla and king companies I have done ROICs on I have not deducted R&D. Wind's R&D spending is indeed high as a percentage of revenue. But companies like BRCD do invest about 15% in R&D. Others like Seibel less than 10% (amazing 173% ROIC), and Juniper 10%. You can use or remove whatever metrics you want, and certainly the high R&D spending by Wind may pay off big time. I'm just listing the metrics in as apple to apple comparison as I can. As Paul Johnson points out in his article, which I linked to earlier, you could basically pick out the technology gorillas and kings by looking at their ROICs, particularly in comparison to similar companies. Wind's is below the level of most G&K companies at this time. However, since investing is inherently a forward looking activity, if you see Wind gaining much value from all the R&D spending now, then you must anticipate substantial ROIC improvement going forward. If so then WIND should out appreciate most of the rest of the market. However, what I interpret the lower ROIC to be at the moment, is that WIND is not at gorilla status yet. Its market strength and control of the value chain is not sufficient (at least yet) to raise if ROIC to more gorilla like levels. So for those who see it as coming, as inevitable, just watch the ROIC overtime, it may act as a good proxy for increase in gorilla power. For those more into buying after a company is already a gorilla, use the metric as an aid in making this determination. As usual, all metrics are only as good as their intepretation and application. Tinker