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

To: Uncle Frank who wrote (49264)	11/29/2001 3:58:23 PM
From: Thomas Mercer-Hursh	Read Replies (1) \| Respond to of 54805

your suggestion that we add in Depreciation & amortization and subtract purchases of property & equipment would seem to favor companies that don't find it necessary to add infrastructure to support anticipated growth. I'm not sure this is a reasonable way to evaluate growth companies. Why not? Isn't this one of the reasons that a software company can be such a short term cash cow by comparison with a hardware company? If the company has high growth potential, plowing that money back in will still produce high growth, potentially leading to a time when less investment is required. This is simply another example where one can't simply use any number on its own without considering where the company is in the TALC and such.

To: Uncle Frank who wrote (49264)	11/29/2001 4:10:20 PM
From: Eric L	Respond to of 54805

re: CSFB Tech Conference Firms that will be making a presentation at the CSFB Tech Conference include: QCOM, SUNW, SYMC, MCHP, LSCC, JBL and MERQ. Presenting tomorrow are: CSCO, FMKT, BRCD, PRGN, FDRY, NOK and ITWO - Eric -

To: Uncle Frank who wrote (49264)	11/29/2001 5:33:12 PM
From: Pirah Naman	Respond to of 54805

uf: Before we skip past operational cash flow, how does a company derive a "Tax benefit from exercise of stock options", and do you think this is meaningful? It is meaningful in the sense that it affects their financial position, in that it gives some insight into employee compensation, in that it is a flag for you reminding you that this depends not solely on how the company operates, but largely on stock market conditions. So I would certainly look at it, ponder its magnitude, but I would not give the company credit for it, as it can be greatly impacted by events which have relatively little affect on the company's business. How it works. Imagine that you run a company, and give me options for working for you. Say you price the options at $1 a share. When I exercise the options, I sell the shares. So maybe Ethan buys the stock shares from me for $10 each. I pocket $9. You then claim that you paid me $9 compensation which reduces your taxes, just like the $0.25 salary you pay me. However, you spent no cash on this compensation - Ethan did. You just change some accounting; the shareholders gave you permission to give away part of their company to make me feel good about my deprived life. Of course, if you are pulling an Enron, and the stock goes to $0.36, I'm not going to exercise my options. Re your comments on capex, your suggestion that we add in Depreciation & amortization and subtract purchases of property & equipment would seem to favor companies that don't find it necessary to add infrastructure to support anticipated growth. I'm not sure this is a reasonable way to evaluate growth companies. You mean like Enron? :-) I wrote the philosophy behind this up before, so I'll just refer you to it instead of rewriting: Message 13520970 What we are looking for are companies which make so much money that they have lots leftover after doing those things. A G or K should be a great generator of FCF. There is your tie-in to GGing. A mark of competitive strength and operational excellence is loads of FCF. That is true outside of GGing as well. Of course, as Thomas pointed out, we need to consider a company's current position in TALC when judging whether their FCF is sufficient. This is also why I stated before that we woud do well to set some sort of standards we expect companies to meet. In general, we would not expect a young gorilla to do worse than a mere candidate in tornado, and we would not expect a silverback to do worse than a young gorilla. - Pirah

To: Uncle Frank who wrote (49264)	11/30/2001 10:30:09 AM
From: areokat	Read Replies (1) \| Respond to of 54805

>>would seem to favor companies that don't find it necessary to add infrastructure to support anticipated growth. I'm not sure this is a reasonable way to evaluate growth companies. << This article from Wired has some bearing on your observation. Although it starts out about Microsoft and the implications of the X-box, the main thrust of the article is the farming out the manufacturing process. The capex expenditures would not show up on softie's financials. wired.com <snip> "Without Flextronics, there would be no Xbox - only the idea of it. "Microsoft has a ton of money, but if they had to build factories, they wouldn't have done this project," says Flextronics chair and CEO Michael Marks. "If guys like us didn't exist, guys like Microsoft wouldn't do a hardware product. The risk would be too high." This isn't the full article. The paper version talked about how Flextronics was able to reduce supply costs below levels that someone like softie could only achieve. Kat