It's all about the science this week at The Motley Fool. Yesterday we were looking at how to replicate Biotech's 5-Baggers. Today, we're talking about how to profit from nanotechnology. Both fields are at the forefront of David Gardner's mind, and you can rest assured that his new Rule Breakers ultimate growth newsletter will follow them closely.

In today's Motley Fool Take:

Ford: Clever Bank, Bad Car Co.


Seth Jayson (TMF Bent)

No need to beat a dead horse here. Ford(NYSE: F) announced third-quarter results today that have been variously spun as meeting or beating analysts' expectations. But we'll get to the bottom line right here at the top: Ford Is losing big money on cars, $673 million before taxes, 11% worse than last year's Q3.

It's not tough to figure out why. Along with GM(NYSE: GM) and DaimlerChrysler(NYSE: DCX), Ford has been engaged in a war of attrition for that most fickle and unpredictable metric, market share. The weapons? Massive giveaways, price cuts, cheap financing, clowns, balloons, hot dogs, dog-shaped balloons made by clowns. You name it; they're slinging it these days. Hey, it's a great way to scare up an 8.6% increase in car sales and turn it into a widening loss. (I wonder if Netflix(Nasdaq: NFLX), Blockbuster(NYSE: BBI), Wal-Mart(NYSE: WMT), and AMZN) are capable of absorbing this lesson in the midst of their own price war.)

Management hopes to avert investor eyes from the deteriorating car results with gems like, "South America, Asia-Pacific/Africa, and Mazda were all profitable." Of course, that's a little like McDonald's bragging that everything else is going down the tubes, but hey, the Fruit 'n' Yogurt Parfait is busting out -- a completely fictitious scenario, by the way. The truth is that Ford's few profitable car markets are a tiny part of the whole.

So sing the praises of the credit wing for pulling Ford out of the hole and delivering a bottom line of $0.15 per share, exactly at the top end of the seal-baiting guidance "increase" issued a few weeks back. But don't sing too loudly.

The results aren't as robust as investors might like. First off, financial services revenues were actually down 4.6%, and the 38% jump in pretax profit was owed to "improved credit loss performance and leasing results." A look at the release shows that the turbo boost came from a 25% drop in depreciation and a 36% drop in provision for losses; in other words, bean-counters' tricks.

Does it make sense to lower charges for losses while interest rates rise on an American public already leveraged to the hilt? You want to call a bet based on that assumption a gain? This isn't just the story for Q3, but for the whole year. Some return to profitability.

Even Ford's more public magic trick -- Steve McQueen's return from the dead -- can't help the company these days. I don't say this often, but investors would be better off spending their dough on the product than the stock.

For related Foolishness:

Seth Jayson drives a Ford truck, but at the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.

Discussion Board of the Day: Parents and Expecting Parents

Do you have a LeapPad or a Leapster or any other LeapFrog product? Do they stimulate a child, or are they just more needless electronic gadgetry? All this and more in the Parents and Expecting Parents discussion board. Only on

The ABCs of IBM


W.D. Crotty

When IBM(NYSE: IBM)reports earnings it issues a press release worthy of an information technology company. From gross margins and pre-tax margins by business segment to revenue by source (internal versus external), there is a lot to savor. So, lean back, and let's examine IBM.

A: The basics
Third-quarter revenue rose 9%, and earnings, before a one-time charge for pensions, jumped 12%.

Revenue was strong across all industry segments. Geographic results, however, were mixed. Adjusted for currency, Europe/Middle East/Africa revenue was flat, while the Americas (the largest segment) led with a 7% increase. There was 30% revenue growth in the emerging markets of China, India, Russia, and Brazil.

Gross profit margins rose from 36.3% in the third quarter of 2003 to 36.9% this quarter.

Global Services (49% of revenue), which include outsourcing, consulting, and maintenance, ended the quarter with a backlog of $110 billion.

The backlog bodes well for future business, and the overall performance shows that IBM products are in demand.

B: The balance sheet
Since the end of 2003, cash increased 26.5%, inventories declined 12.3%, and debt fell 7.1%. That's great performance -- and that's all that needs to be said.

C: The technology
Research and development (R&D) spending is 6.1% of revenue -- that's $1.4 billion for the latest quarter. That percentage of revenue compares favorably with the 4.6% at Hewlett-Packard(NYSE: HPQ) and 5.2% at Apple(Nasdaq: AAPL) but pales when compared with the 13.3% at Cisco(Nasdaq: CSCO), 14.0% at Intel(Nasdaq: INTC), 15.5% at Sun Microsystems(Nasdaq: SUNW), and 17.9% at Microsoft(Nasdaq: MSFT).

IBM is not underfunding R&D. Consider that services, a large percentage of IBM's revenue, skew percentage-of-revenue comparisons unfairly. Consider too IBM's impressive array of technology includes more than 700 nanotechnology-related patents and the world's fastest computer. Besides, how do you compare R&D spending results other than with sales -- and those are just fine.

Adding A + B + C
IBM, with growing sales, an improving balance sheet, and an adequate level of technology investment, sells for a modest 17 times 2005 earnings -- yet the stock is trading at the same level it was 52 weeks ago. IBM the company is hardly overlooked. IBM the stock is unloved (for now) but building value.

Want to learn more about R&D? Check out Ruminations on R&D by Ben McClure.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.

Quote of Note

"All I can say about life is, Oh God, enjoy it!" -- Bob Newhart

Smoke Across the Water


Seth Jayson (TMF Bent)

The cigarette game remains exciting more for courtroom drama than the marketplace. That fact was driven home today by business as usual from Altria Group(NYSE: MO). The firm's third-quarter results show modest gains on the top and bottom lines, but nothing that would signal an end to the stock's recent doldrums. Revenues climbed 8.5% over last year's Q3, but a quarter of that was favorable foreign exchange. Earnings per share of $1.29 represent a modest 5.7% gain, hampered, to some extent, by mediocre results at Kraft(NYSE: KFT).

Aside from that, the quarter looks much like any other: a bit of market lost here, a bit of gain there. And the give and take worked out well, since the give across the pond made up for the take back home.

In Europe, there were big drops in Germany and France, and even the smoke-happy Italians exhibited a reduced appetite for Marlboros. Still, gains in other foreign markets such as Spain, Central Europe, and Eastern Europe -- lifted by acquisitions as well -- helped Altria book a 5.1% increase in volume.

Sure, there are legal hurdles, and yes, this fish is so big that it may never get much bigger, but with huge free cash flow and a dividend that should make income investors salivate, Altria, like peer Reynolds American(NYSE: RAI), is a steady-looking staple for investors who can both get over the whole smoking thing and pick it up when it's cheap.

For related Foolishness:

Seth Jayson has to admit that he's swayed by 6% dividend yields. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.

EMC Earns Its Keep


Tim Beyers

Man, I hate sounding like a broken record. But, man, EMC(NYSE: EMC) has a great business. This morning, the data storage provider reported that revenue increased 34% year over year to $2.03 billion while net income grew 37% to $218 million, or $0.09 per diluted share.

A favorable currency exchange climate boosted EMC's revenue by 3.1%, but that's a pittance when you look at how the core business did overall. Sales in every part of the world grew by double digits, including a 44% jump in Europe. Vive la storage, indeed.

Many other indicators show a business firing on all cylinders. Gross margin, for example, improved to 51.4% for the quarter and 50.7% year to date. That's 7% better than at the same point last year. Finally, get this: Structural free cash flow grew 86% year over year, from $399 million to $742 million.

The only question remaining is whether EMC can continue to do as well as it has. Management seems to think so. Fourth-quarter estimates call for revenue between $2.23 billion and $2.27 billion, with per-share earnings coming in at $0.11 to $0.12. At that rate, structural free cash flow should easily eclipse $1 billion for the year.

I admit it: I still love this business. In fact, I love it even more with each successive quarter. Yet EMC's stock options policy continues to hurt its results. Indeed, had options been expensed -- as they will be beginning next summer -- EMC's reported net income would have been 40% lower. Ouch.

Fortunately, there have been some improvements in EMC's options policy. Though dilution remains high at roughly 9% -- well above the 3% to 5% we recommend for growing firms -- overall options grants are down, and more than 50% of EMC's outstanding options are out of the money. (CEO Joe Tucci has gone on record saying management won't reprice them.) Plus, 20% of EMC's options issued last year were in relation to acquisitions that have helped fuel the firm's remarkable turnaround.

Still, in an interview this morning, EMC Chief Financial Officer Bill Teuber noted that the company would continue buying back shares to offset dilution. Indeed, the firm has already spent better than $400 million to retire 37 million stubs this year. Sorry, Bill, but I think that stinks. Why? Because EMC's stock isn't cheap. If anything, EMC appears fairly valued trading for 23 times expected cash flow to enterprise value.

But should this really keep you or me from investing? After all, as Fool co-founder and Motley Fool Rule Breakers chief analyst David Gardner put it to me yesterday, there are plenty of market-trouncing stocks that dilute like crazy, such as Motley Fool Stock Advisor picks eBay(Nasdaq: EBAY) and Activision(Nasdaq: ATVI). True, indeed. And given the underlying strength of its business, EMC could be a prime candidate to follow in their footsteps.

For related Foolishness:

Fool contributor Tim Beyers is seriously contemplating buying stock in EMC, but the Foolish rules require that he wait a while. You can view Tim's Fool profile and stock holdings here.

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