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

To: Gary Metzer who wrote (63861)	9/5/1998 11:14:00 PM
From: Chuzzlewit	Read Replies (4) \| Respond to of 176387

Gary, you raise some interesting points. Valuation based on book value is downright silly for several reasons. First, book value is the historic price of assets less management's estimate of its depreciation less liabilities. Land is a non-depreciable asset, and intangibles are generally excluded. So lets take the problems one at a time. 1. Fixed assets. We know that assets placed in service some years back can have market values significantly less than book value. Suppose you are talking about a company with some older IBM mainframes -- do you really thin assets like that are significant? I don't. So this means that the entire asset base needs to be revalued in terms of the current market. 2. Current assets. Receivables are not worth their face value. Some of them will never be realized (bad debt), and others will be partially realized. 3. Realization of book value. Book value could only be realized in the case of the company liquidating. But a company rarely decides to liquidate if its profitable. And if it isn't profitable it will have seen a significant erosion in book value prior to the decision to liquidate. Furthermore, realizing full book value depends on finding a willing buyer and a willing seller. Sale under a period of duress (which is the likely condition under which a company is liquidated) results in the sale of fixed assets of pennies to the dollar based on market value. Thus, book value as a safety net is an illusion 4. Concept. Realization of book value aside, the idea that the historic cost is germane is frankly idiotic. If I had a black box which generated exactly $1000 every year guaranteed, and if the long term interest rate were 5%, the value of the box would be $20,000. If a potential investor discovered that the cost of the bits and pieces cost only $5 he would be a fool to think that that knowledge would drive the price down. The black box trades based on its cash generating ability and on long-term interest rates. Businesses are no different. The only time there is a potential issue is when the value of the bits and pieces exceeds the value of the cash generated by the business. That like the goose being more valuable than the golden eggs it lays. So Fleckenstein and others are willing to value companies on the basis of slaughtering golden-egg laying geese. Fascinating! And these guys call themselves analysts. TTFN, CTC