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

To: porcupine --''''> who wrote (1306)	2/19/1999 11:16:00 AM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Porc, >>Has Buffett Now Accepted the 3rd Era of Value Investing Thesis --???> I agree with you about the effect of inflation on capital intensive businesses and how it relates to earnings quality. I don't think cash is gushing in for them though. What one might say is that in the inflationary periods they were generating less FREE cash than the earnings levels would indicate. The inflation adjusted earnings were lower due to inadequate depreciation charges. In this environment they are really making what they are reporting. This effect of inflation has been well known for a long time by value investors. In the case of the cable business, some of the capital expenditures are one time events as the infrastructure is laid down. So one could really question how much of the depreciation should really be charged to earnings to begin with. Inflation or not some infrastructure will not be replaced. This is a rare business. I certainly don't have the answer here. But I believe it is an issue and difference as it relates to the discussion. In the case of GLK, I suspect that this is not a long term core holding. GLK is going through a restructuring that is generating a pile of excess cash as it is selling some businesses. If current earnings estimates are met, the ROE on non-cash book will be very high. Especially if the cash is put to good use. I think this is mostly a restructuring and new management story that is releasing value. In general though I'm sure that Buffett and all other value investors realize that earnings quality for capital intensive businesses is higher now than in inflationary periods. That doesn't mean that they are better investments. It's more like they don't stink anymore. They are on a par with non-capital intensive businesses that generate similar ROE for as long as this environment lasts. I do think that companies that buy a lot of computer technology might benefit these days. I think the deflation in this area is a more permanent and sustainable thing. His purchase of Flight Safety comes to mind here. But technology is only one part of the spending pie. On the inflation front, you might be under-estimating the eventual effect of the U.S. being an enormous debtor with a giant current account deficit. Debtor countries have a history of paying back their obligations with cheaper money.....devaluing and inflating. Wayne