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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Nazbuster who wrote (58)	3/11/1998 10:59:00 AM
From: porcupine --''''>	Respond to of 1722

<< I understand your concept of value investing, but let me ask a fundamental question: Do your calculations include the assumption that these great cash cows are either immune or resistant to competition or that the huge cash flow somehow reflects that they are doing a better job? >> These questions give an opportunity to mention some of the details of GADR's valuation methodology. The cash earnings calculations are based upon the assumption that Value Line's forecasts, on average, are better than flipping a coin. See: "Forecasting Future Cash Earnings " at: web.idirect.com To my knowledge, Value Line does not assume immunity from competitive adversity for any of the companies it covers -- not even MSFT. In the case of most of the stocks I follow, VL explicitly discusses competition, in the industry profiles and/or the individual company presentations. As to whether I assume that high cash earnings imply a company is "doing a better job", I've never really thought about in those terms. But, it certainly is a vital issue, namely: Is the company doing a better job; or is it not? To begin with the opposite situation, I suppose that I do assume that a company that lacks strong cash earnings is not doing a good job. If a company is generating high cash earnings, I am inclined to look at 2 main ratios to judge whether this constitutes a "good job": cash earnings to revenues, and cash earnings to book value. The higher these ratios the better. But, they must be judged in relation to the general Market, the particular industry, and the company's individual historical record. Further, the direction in which VL forecasts these ratios to move in the future is also relevant to how good a job the company is doing. << I certainly understand an IBM whose customers are locked into millions of dollars of technology and would find it difficult to switch to another vendor. But sometimes it pays... I have a friend with a product which competes with one from Computer Associates (CA). He offers the product to CA users at 60% of their 5-year maintenance cost! In effect, he is giving it away free and charging 40% less maintenance in addition! (His product has higher ratings by Gartner Group.) With a better product and lower prices, he is finding his sales easy. This is just one guy, not a massive corporation. >> CA is a company I follow. I had the pleasure of seeing their CEO, Charles Wang (no relation to the legendary An Wang) on television recently, talking about CA's proposed takeover of service provider Computer Sciences. I got to see Wang's smashed nose, which was injured in a tennis game with an employee of CA. (Wang subsequently promoted the employee who had broken his nose.) A major source of CA's growth has come from acquiring smaller competitors. Your friend may someday "get-rich-up-front" from a takeover offer by CA. << Every company must continue to compete with better products, better service and lower prices (ideally). >> No doubt about that. << The existence of a large cash flow does not guarantee survival. Compaq just reminded us of that this week. >> A more relevant comparison, which underscores your point, might be Compaq's intended takeover target, DEC. Compaq has always faced daunting competition. DEC, believe or not, was once believed to have a lock on its segment of the computer market (mid-sized computers). Founder Ken Olson famously once said, "There is no reason anyone would want a computer in their home." --- Reynolds Russell web.idirect.com "There are no sure and easy paths to riches in Wall Street or anywhere else." (Benjamin Graham)