It's showtime in Tempe tonight, as President George Bush and Sen. John Kerry head to the desert for one last presidential debate. All indications are this race is going down to the wire, so this should make for good TV. Will one of them go for a knockout punch? Will there be a gaffe that sways voters? Will Howard Dean show up with a rousing rebel yell? You never know.

Tonight the focus is economic policy, so tune in to find out what the candidates plan to do with your money.

In today's Motley Fool Take:

Intel's Inventory Bugaboo

Let's do the math. You have $3.2 billion in inventories, you pledge to get them under control, and at the end of the quarter, your inventory value has dropped by an astounding $43 million, a rounding error. How is it that people are happy? And just wait until people synthesize the fact that one of the big reasons that inventory dropped at all was because you wrote down some undisclosed amount of them. Things are not what they seem at Intel.


Bill Mann (TMF Otter)

It is no small measure of the goldilocks nature of the technology market that Intel(Nasdaq: INTC) missed its earnings number, faces what will certainly be pressure on its operating margins, and still has its stock price rise rapidly on the basis that, as a Goldman Sachs(NYSE: GS) analyst noted, "a worst-case inventory and margin scenario was averted." In my analysis, the proper word isn't "averted." It's "delayed."

Intel reported earnings last night of $1.9 billion, or $0.30 per share, which is 5% higher than a year ago. Back out the fact that Intel's effective tax rate for the quarter only hit 21%, substantially lower than its expected 31% and well below last year's level, and earnings are essentially flat from last year's result. The company's revenue came in at $8.47 billion for the third quarter, a slight gain of 5% over the previous quarter. This is substantially lower than Intel's normal third-quarter sequential gains, even over the last tepid few years, of 7% plus. Most importantly, it seems, is that Intel's inventory levels declined over the quarter, from $3.2 billion to $3.18 billion, a reversal of a recent trend that some Intel watchers have labeled "surprising."

I'm shocked, shocked!!
Surprising?!? Only perhaps because the company had guided that the levels would be $100 million or so higher. But as we'll see in a minute, even this drop isn't what it appears to be. Intel's inventory has been at record levels for the better part of the year, and we've been watching its customers' inventory levels rise and rise and rise. Inventory rising is not in and of itself a bad thing: Companies build up inventory when they believe that the demand for their products is going to increase. What has happened over the last nine months at Intel has been anything but. Five percent sequential revenue gains over what traditionally is the weakest quarter of the year are abysmal. They built it; not enough came.

So Intel decided to bite the bullet and bleed off inventories. Intel's gross margins tend to sit near 59%, and Intel watchers expected them (due to the company's commitment to burn off inventories) to drop to 58%. Instead, gross margins sank to 55.7%, and the company announced that it anticipated that they would remain at about that level for the next quarter. Apparently, this wasn't enough, so the company wrote down even more inventory value.

Please click here to read the rest of Bill Mann's excellent commentary on Intel.

Discussion Board of the Day: Pixar

Would you rather own Pixar or DreamWorks Animation? Which company has the better growth prospects? How will The Incredibles fare next month? All this and more in the Pixar discussion board. Only on

Slow-Cruisin' Harley


Seth Jayson (TMF Bent)

While naysayers have wondered how many cycles Harley-Davidson(NYSE: HDI) can possibly sell, the firm's third-quarter numbers were steady. Most of the reason, of course, is that another bike -- Honda(NYSE: HMC), Suzuki, whatever -- is simply not a Harley. And for Americans with disposable income to spare, nothing else will do. Witness the Hell's Yuppies that swarm through affluent D.C. suburbs sporting headgear that, decades ago, was limited to neo-Nazi biker-gang stereotypes in drive-in B films. Even my dear old dentist Dad has a garage so full of Harleys that it's nearly impossible to stuff in a car or lawn mower.

True, this quarter's motorcycle retail sales were down 10% compared with the same period last year. But the 100th anniversary celebration for the prior-year quarter is one of those rarities in financial reporting: a management excuse that doesn't sound like bunko. There's more to be excited about the further you read: Total net revenues climbed 15% to $1.3 billion. Earnings per share were up 24% to $0.77. Free cash flow of $847 million already eclipses last year's tally for all four quarters.

There's little question that Harley's profit margins, balance sheets, and 28% return on equity make it a lot easier to love than other heavy motor industries, such as 4-wheeled box-makers like Ford(NYSE: F), DaimlerChrysler(NYSE: DCX), or GM(NYSE: GM). And though sales targets are aiming for growth in the range of 10% and lower, consistent stock buybacks and zealous work on margins reward shareholders. There's no doubt this is a great company. But is it a great price these days? My own inclination is no. Luckily, periodic cases of Wall Street nerves often give investors a chance to move Harley from their wish list to their portfolios.

For related Foolishness:

Seth Jayson's bike-happy relatives have purchased way too many Harleys over the past few years. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.

Quote of Note

"Human beings, by changing the inner attitudes of their minds, can change the outer aspects of their lives." -- William James

The GoldenArches' Golden Times


Brian Gorman

The good times continue to roll at McDonald's(NYSE: MCD), and the sales increases could last longer than expected.

The burger slinger announced today that September comparable restaurant sales jumped 7.3%, driven by a 10.6% jump in U.S. sales and a rise of 7.3% in the Asia/Pacific, Middle East, and Africa areas. Sales in Europe were the one soft spot, as they declined 0.6%.

Still, for all of the third quarter, even European sales improved (albeit slightly), putting growth at a nice 5.8% clip. These gains on the top line translated into equally satisfying earnings results, with McDonald's posting preliminary results of $0.61 per share, up 42% year over year. Even after subtracting out a $0.07 per-share tax benefit in the quarter, Mickey D's profits remain something to behold.

So, how long can these happy days go on? Motley Fool contributor Cass Bielski recently noted that McDonald's performance is likely to level off after a strong recovery. Still, investors should probably not expect a major slump in sales.

After a long period in which burgers got a bad rap, America's signature food is enjoying a renaissance. The low-carb diet has helped this trend along, as even those folks who are not dieting are discovering that good, old-fashioned red meat may not be so terrible after all. CKE Restaurants(NYSE: CKE), Steak n' Shake(NYSE: SNS), and scores of others are seeing the benefits of this change in attitude.

McDonald's results may not be as supercharged as they have been in the past. But eating habits have changed, and this probably means that the fast food giant will have an easier time of growing sales over the long haul.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.

It's Good to Be Yahoo!


Rick Aristotle Munarriz (TMF Edible)

You know life is good when Yahoo!(Nasdaq: YHOO) sees its third-quarter profits more than triple, in large part because of realized gains after trimming its stake in rival Google(Nasdaq: GOOG). You go, Yahoo! Show the world that there's money to be made in selling Google -- the ultimate diss.

However, even if you back out the liberating hand it played during Google's market debut, Yahoo! still turned in a great period. Revenue beyond its traffic acquisition costs soared by 84% to $655.4 million while earnings per share went from a nickel to a heartier $0.09 showing.

Yes, paid search is obviously still booming, and one can only imagine merchants even more anxious to bid up relevant keywords as we enter the seasonally potent holiday quarter.

So it should come as no surprise to see Yahoo! expecting sequential improvement, with anticipated fourth-quarter revenue of between $710 million and $760 million after backing out its traffic acquisition costs. If anything, those sums may prove to be conservative as they imply top-line growth of less than 50% from the $511 million the company produced during last year's final quarter after backing out the same traffic acquisition costs.

Then again, it was during that quarter that Yahoo! recognized that paid search had become so important to the company that it began adjusting its reported revenue to account for the sums it was paying out to its distribution partners in exchange for displaying its paid search results.

Paid search is why Yahoo! and Google are booming these days. It's also why smaller players such as FWHT) and Ask Jeeves(Nasdaq: ASKJ) have turned in healthy returns.

Our new Rule Breakers newsletter seeks out companies that reinvent the game as we know it. Paid search -- in which folks can bid as little as pennies for an interested lead -- has certainly reinvented the search engine and contextual advertising games. With a win-win-win scenario in which the portals, the merchants, and the end users all come out ahead, this was one rule that was just begging to be broken.

Longtime Fool contributor Rick Munarriz does Yahoo!, but that doesn't mean that he is buying it breakfast or adding it to his portfolio. He does not own shares in any company mentioned in this story.

More on Today

Nokia or Qualcomm? Dell or HP? Does it matter who wins? Maybe not, Rich Smith says in Agnostic Investing.... You might hate his tactics and his team, but the New York Yankees' owner is one heck of an investor, Tim Beyers says in Invest Like Steinbrenner.... In A Magic Margin Formula?, Marko Djuranovic explains how to use margin and not dissolve your portfolio.... Acquisitions can juice sales but can also lead to messy balance sheets. A simple test can sort them out, Rich Duprey says in How to Spot a Serial Acquirer.

In other news:

For a list of all our stories from today, see our Today's Headlines page.