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Technology Stocks : Siebel Systems (SEBL) - strong buy? -- Ignore unavailable to you. Want to Upgrade?

To: Wizard who wrote (2201)	10/16/1998 12:12:00 PM
From: Reginald Middleton	Read Replies (3) \| Respond to of 6974

The fact that SEBL is not going to maintain their historical growth rate does not mean they are going to stumble. With all due respect, it sounds as if you are injecting a bit of emotion into the analysis. I am not saying that SEBL will not grow, I am saying that they are not investing into the future at the same rate that they have historically, therefore they may not grow as fast a company that may do such. If the share price is based on the historical growth trend projected out to the future and that growth trend is, in reality, altered then the share price will adjust. When growth companies expand their net margins, they make a discretionary decision not to increase their long-term investments at the rate that their revenues are increasing. Most long-term investments made before the net income to margin line are not taxed, therefore increasing the economic cash flow of the company (assuming the investment has not flopped). They can go into marketing, R&D, and M&A. These investments are called expenses according to accrual accounting measures. The moniker of expenses is misleading due to the time lag, recurrence, and multi-period benefit accruing from the cash outlay. The accounting practice has attempted to mitigate this discrepancy by allowing for the capitalization and amortization of certain expenses, which allows them to be carried as an asset until fully amortized, which is simply a more convoluted fashion of accounting for them as a medium to long term investment in the first place. As an example, Microsoft's 250 million-dollar marketing blitz was a discretionary investment, not an operating expense. Most companies do not spend that much money in one year to market an 'about to be released' OS product and it is not necessary for normal operations. What MSFT did was to redirect monies that would have been taxed at the corporate tax rate as net income, then sit in a cash or short-term securities account making less then 6% interest and invest it in a project that management believed would have a superior yield, both financially and strategically. Do you think they made the right decision? Notice that the benefits of the marketing blitz are being realized today (3 years later) although MSFT was able to account for it as a one-time expense. This gave them a tax break (significantly increased cash flow) on a very profitable investment that should have been capitalized if one were to look at it from a purely economic point of view (the view of the shareholder). That is why MSFT almost never capitalizes their expenses, but chooses to expense everything whenever possible. It is cheaper, much cheaper, although it reduces earnings, it significantly increases cash flow. This is one of the many reasons why I preach the pitfalls of capitalized earnings as a proxy for market value. If you have not already read it, I have written a highly regarded and informative article on the topic, The Case Against Earnings at rcmfinancial.com Equity investors should look at a business from an ongoing entity, or economic perspective. GAAP accounting measures look at a company from a creditor's perspective, more so that of liquidation value at any given point that of a viable long term investment.