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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Patrick E.McDaniel who wrote (47923)	6/16/1998 9:44:00 PM
From: Gabriel008	Respond to of 176387

Motley Fool must have had DELL in mind when they wrote this article given that its Return on invested Capital was 229% last quarter.The last sentence says it all. Growth Isn't Always Good Investors have taken to heart the idea that growth is good. The shorthand for company performance today is encapsulated in the following news blurb: "Growth Stock X jumped $10 to $40 after announcing first quarter EPS of $0.10, up 50% over last year, beating the mean analysts' estimate of $0.05." Earnings growth alone isn't responsible for advances in shareholder value, though. The quality of earnings and the underlying levers of leverage, margins, and capital productivity are a big part of the reason why stocks move up or down. Earnings per share growth is only part of the puzzle as to why the value of a business increases. There are two moving parts to the movement in a stock's price -- the valuation multiple and the growth of the value to which a multiple is assigned. For example, if earnings per share increases 20% year-over-year and a company holds its valuation of 20 times earnings per share, then its share price will have advanced 20% over that year. However, one can't assume that P/E multiples will always stay static. The contraction or expansion of P/E multiples is very much related to underlying dynamics. For instance, recent lamentations from various popular magazines regarding market P/E multiples ignore the fact that the S&P 500 as a group is free cash flow positive for the first time in a very long time and that the aggregate inventory/sales ratio for the S&P 500 is at its lowest point in decades. Corporations are managing their supply chains better and have to tie up less cash in current assets. The less current assets you need to run your business, the more those current assets can be financed by current liabilities. Say you're running a business with 60 days of inventory on hand, 45 days sales in receivables, and your noninterest-bearing current liabilities turn over 14 times a year, or every 26 days or so. You're generating negative working capital float because cash flows out for current assets more quickly than cash comes in from current liabilities. Incremental increases in sales will suck up cash, so an investor has to look not just at capital expenditures when a company expands, but they also must consider the need to finance this negative working capital float. The S&P 500 companies have effectively reduced their financing needs, as evidenced by the established long-term decline in inventory-to-sales ratios. The capital necessary to expand sales is thus reduced, meaning the net burden on the liabilities and equity side of the balance sheet is lessened. The earnings growth that results, even before counting the decreased interest costs of carrying the negative working capital float, is of a higher quality than that of a company that has to pour cash into receivables and inventories to facilitate growth. Berkshire Hathaway (NYSE: BRK.A and BRK.B) Chairman Warren Buffett has said, "I am a calculator." Besides his innate and highly apparent facility with numbers, Buffett spent a lot of time doing calculations on the way a company's financials work before he got to the point where he could make a bid on a business with a look at its financials and no extensive due diligence. Eventually, one gets to the point where the principles of assessing return on invested capital and economic value added (EVA), whether you call your mechanism these things or not, becomes a basal function for the investor. A company beating its cost of capital is easy to spot by looking at its financials. If a company starts in year A with average invested capital of X and generates a return on invested capital of 0.2 X (or 20%) and the cost of its capital is 10%, then that spread between return on invested capital and cost of capital indicates that it is creating value. If it then follows up with a 20% increase in after-tax operating earnings with an increase of only 10% in average invested capital, then that spread will widen and its valuation should increase if it can sustain these economics. The incredible expansion of the P/E in the shares of Coca-Cola Co. (NYSE: KO) over the last fifteen years is very much a product of this thinking. With a core business producing products with universal applicability and appeal, CEO Roberto Goizueta eventually came to the conclusion that there was more than enough room for growth without the synergies of things like its Columbia Pictures investment. If return on additional invested capital in the movie business was 15% but was 30% in the soft drink business, the movie business was correctly divested. The return on the redirected resources confirmed the decision. You can buy a lot of things that will make earnings grow, but if the returns on those things are lower than could otherwise be reasonably attained, the P/E of your stock will drop. Although a useful discounting mechanism if the economic characteristics of a business don't change, the price-to-earnings growth model (or PEG) doesn't take into account what is driving earnings growth. This is where the concept of return on marginal invested capital should be applied. Although it looks at the change in after-tax operating earnings over the change in average invested capital and thus looks at what has already happened, it tells you about the economic characteristics of new investments being made. If Coke were to start making investments that generated a 10% return on invested capital, it could still grow earnings at a very high rate if it threw lots of money at those investments. However, its return on marginal invested capital couldn't be hidden. Its P/E would fall below its current level above 50 if new investments showed such a poor return. Growth isn't always good, and stocks aren't always underpriced at a P/E equal to half their growth rate or overpriced if they're generating no earnings. How they are going generate earnings in the future and the economic resources needed to do so and to generate further earnings increases off that base are paramount to the valuation of a company. Those rare large companies that can internally finance rapid growth over a number of years (not just through one or two product cycles, which is when most growth companies start to stagnate) are worth a heck of a lot more than most other publicly traded companies.

To: Patrick E.McDaniel who wrote (47923)	6/17/1998 11:49:00 AM
From: kemble s. matter	Respond to of 176387

Patrick, Hi!!! Now you sound like the Patrick of two years ago...buying Dell based upon what others and of course yourself thought of their products..Is it a wonder anyone buys any product other than a Dell? More and more people are discovering they can't afford not to do business with Dell. For instance the links that JBN3 just sent me concerning the deals Dell was handing out to educators or corporations that have large contracts with Dell...Dell is #1 and still gaining market share in these areas...that is what really impresses me about Dell...Dell is not only Direct...Dell is Driven! Best, Kemble