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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: jeffbas who wrote (3235)	2/15/1998 5:18:00 PM
From: James Clarke	Respond to of 78603

Solid argument on capitalizing R&D. Same reason you don't add back depreciation without subtracting capital expenditures. You convinced me. In special situations, however, it may be appropriate. Merck is not one of them, but I still think AOL may be. Since it is new, you might not have the historical amortization offsetting today's investment spending depending on what kind of assumptions you made about. But your argument is not to be taken lightly.

To: jeffbas who wrote (3235)	2/18/1998 11:52:00 AM
From: Reginald Middleton	Read Replies (1) \| Respond to of 78603

<Trying to justify valuation for Merck by saying how much lower its P/E would be if you capitalized R&D is, in my opinion, just as questionable as capitalizing the huge ad expenditures for a consumer products franchise like Coke to justify its P/E.> IMO, the problem is using capitalized earnings as the measure of value, and not the use of capitalized R&D and/or marketing. R&D and marketing are actually investments, whose efficiency can only be measured realistically if they are capitalized and amortized over a reasonable period of time. You then apply the amortized amount to the return on these investments to ascertain the actual value of the investments. To adhere to capitalized earnings in lieu of discounted cash is to submit your valuation to all of the inherent noises and inaccuracies that are known in GAAP accounting and accrual accounting. Reference the reconciliation to net income (to "un-GAAP" the earnings) and the discounting of future cash flows that I performed on MSFT and INTC. rcmfinancial.com RCM