<THE BORING PORTFOLIO>
PC Industry Developments
Plus, what I think about in long lines
ALEXANDRIA, VA (August 23, 1999) --
PC industry news
A bit of a busy day in the Boring universe today. First, Intel Corp. (Nasdaq: INTC) released a new price schedule for Pentium III CPUs. According to news.com, the 600 MHz Pentium III will stay at $669 per unit (in volume) and the "550-MHz Pentium III will drop 26 percent to $487 from $658. The 500-MHz version will sink 41 percent, to $251 from $423." Inevitably, that lowering of CPU prices will be reflected in lower PC prices, an overall positive for lots of companies on the Boring radar, not the least of which are Gateway (NYSE: GTW) and American Power Conversion (Nasdaq: APCC).
Gateway introduced its small form factor E-1400 managed desktop PC. Managed PCs, by the way, are PCs with features that lower the total cost of ownership over the lifecycle of the PC in enterprise settings.
Random observation: I think Nokia (NYSE: NOK) will be one of the most important direct competitors with Dell and Gateway five years down the road. The convergence of mobile computing and communications capabilities and the continued shrinking of form factors makes this competition inevitable, in my mind.
What I think about in long lines
Ever sense that I like companies where price deflation is the norm or where low margins are the norm? I don't think it's some sort of perverse attraction to poor business models. Rather, I think I am more attracted to companies where capital velocity differences are a larger differentiating factor than margin differences in determining a company's overall capital productivity. I don't know if the market is any less efficient in pricing these sorts of business models over the long run (I don't think so), but I do wonder if these sorts of companies are more mispriced in the short run more frequently.
Some of the more memorable blowups that have turned into gigantic opportunities have taken place in PCs, electronics manufacturing services, and certain segments of retail. In theory, this means that the future for a company selling commodity-like goods or services is harder to discount properly than for a company such as, Coca-Cola. True enough as far as it goes. Over the long term, however, I think it's as much of an inevitability as Coca-Cola and Gillette that the great companies are those that can deliver the most value to the customer. In almost anything but oligopolies or monopolies, smaller niches, or proprietary products, a company's growth and success in delivering value to customers will be evidenced by margins that aren't that much higher than competitors, but lower, actually. It's capital management, where I think you see the larger variation across companies, where capital returns and growth capacity will be decided.
I guess I can't say this enough, but I'm neither margin-centric nor am I capital turns-centric in my investing thinking. High margins are not a prerequisite for success -- it's totally specific to the industry. Why are two low-margin businesses, Dell and Wal-Mart, the two most successful equity investments over the last 10 years and 30 years, respectively? It's because return on capital is the more important factor in deciding shareholder returns. A margin-centric approach to investment analysis is inherently flawed, in my estimation, so I guess if I've harped on the subject, I've done so because a turns-centric point of view is vastly and wrongly underrepresented in investment discussion and analysis.
Some stuff I'd like to look at
Generic pharmaceuticals and contract research organizations, mainly Quintiles Transnational (Nasdaq: QTRN). Hard to believe Quintiles has gone nowhere, net, over three years. I want to find out why. I think a discussion there will be interesting, at the very least, and possibly yield some useful findings. And I invite people's observations on the Boring Board.
Finally, on Bore students
The Boring Portfolio board has had some excellent expositions of securities analysis over the last six days or so. I've been out of town and busy with stuff and haven't had more than five minutes to respond to the individual issues. I also haven't wanted to say just a brief "good job" since I've wanted to take the time to comment extensively on the excellent work I've seen. But I didn't want to let more time pass before I did get the chance to say that what I've seen on the board is superb. I don't need to agree with the assumptions or conclusions to say that, as I think it's the process that's most important. I extend hearty snaps to those individuals on the Boring board that have taken the time to educate themselves with such diligence. If I were a mother bird, I'd kick these guys out of the nest, since they're ready to fly on their own.