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July 15, 2007


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I am in touch with the CCC group who did our BLM report on Dell. Interestingly enough, our twelve month price target on Dell wasn't too far off the mark...but August of 2005 saw the beginning of a steep decline in the share price of the company. Dell's stock price bottomed out in August of 2006 at ~USD~18/share and hasn't seen the 30's since. With M. Dell taking the helm again, it will be fascinating if the capital markets reward the company for his initiatives. Dell's move into the low-end retail world (putting Dell's on the shelves of WalMart) is a dramatic move away from their core business plan. Is it a nod toward the commoditization of the industry (if so, it's about 5 years too late!) or is it a positioning move to put Dell in the minds of the lower-end consumer? If it is the later, I am not encouraged to take a position in the company...they would be playing a dangerous low margin game. Their direct to consumer model was revolutionary; it's sad to see them hold on to it a tad too long and not evolve...but this is another conversation for the Strategy Dept.!


Victor Cook, Jr., New Orleans, Louisiana


You didn't miss the point at all. It's a good idea always to "push a competitor into a group that does not – at first blush – seem appropriate." What a great example Hubig's Honey Fruit Pies make. I'll bet they're not on P&G's radar screen! And with a short shelf life maybe they shouldn't be ... unless they can find a way to extend shelf life like they did with Pringles. Readers not familiar with Hubig's might want to read Emeril's short history at http://www.emerils.com/cooking/archives/000658.html.

But, sometimes you have to plow the straight and narrow field, as I found out in the investment banking case. This is a result of the convention of reporting revenues net of interest. As Veryinterested points out in his (or her) comments, this leads to very different capital structures for wholesale bankers like GS, LEH, MER and MS with an average interest expense to gross revenue ratio in the 55% range. While investment banks with a big retail position, like Citigroup and JP Morgan, have an interest expense to gross revenue ratio in the 40% range. Using net revenues in these cases dramatically changes risk-adjusted differentials and hence throws off the results of my competitive stock pricing model.

Great to hear from you. It must be going on three years since you and your team did a Bottom Line Marketing report on Dell and its competitors. Are you in touch with the other members of your team?



VeryInterested and V,

It is with great interest I read your posts...I am both a financial professional and an alum of Victor's...It is good to see this debate lending to the evolution of Victor's research.

One thing to mull over with respect to the companies mentioned here: How do customers perceive the institution?

I have clients who view MER, GS, LEH, JPM, and MS all as competitors of C. Each firm markets to the high net worth demographic and actively pursues this business. The same is true on the I-Banking side, i.e. companies (public and private) looking to raise capital look to these firms for deal structures. So, both the individual investor and the corporate investor are customers of these institutions.

As Victor knows, I am a Customer Experience geek at heart. At the core of CE is the customer perception (right or wrong) of the comapany, its product, their experience with the product and the company, AND the perception of the competitive landscape.

For example, let's take fruit pies. Being a NOLA resident, I am a proud consumer of Hubig's Honey Fruit Pies. Now, several major companies make and sell similar sugar-coated, fruit-filled, snack pies of similar taste and price point. However, I choose Hubig's and will go out of my way to avoid consuming a snack pie if Hubig's aren't available. Am I irrational in my behavior? No. I have an experience with this product, e.g. locally-owned company and great customer service, that goes beyond any narrow definition based on industry code which would put Hubig's in a strategic group with some rather large CPG companies.

When determining the strategic group for analysis, we must move beyond the 10Q or K and examine the more holistic variables that may push a competitor into a group that does not -- at first blush -- seem appropriate.

Victor, you may remember our similar quandry when deciding whether to include SUNW and IBM in our strategic group when examining DELL. HPQ and AAPL were natural fits in the consumer computer market, but we had to look at other business lines, e.g. servers and consulting to round out the group.

I hope I didn't miss this point in the comments on this blog...If I did, mea culpa.

Ever the champion of the customer/client,

Victor Cook, Jr., New Orleans, Louisiana


Over the last several days I've been investigating my competitive stock valuation model applied to four investment banks (MS+GS+LEH+MER). The results I get for these banks just don't make sense ... the stock prices were way off for all of them.

Why? It must be because investors value these stocks partly on their income net of interest expenses. I used gross income because otherwise both risk-adjusted differentials and enterprise marketing efficiency would be "distorted." But, if investors consider net income as the top line, these "distorted" numbers are the real ones.

So I've been trying to figure out why, as you said, practitioners use net income, even though interest expenses are so important. Well, with all the focus on rates these days it finally got through to me: interest expense can't be treated as "cost of goods" sold because management has no control over the fed funds rate! Although they can hedge like Southwest Airlines does with the furture price of jet fuel, this is more like cost containment than cost management.

The good news is the maximum earnings market shares (and everything derived from them) in my later posts don't change much. The bad news I've got to recalculate risk-adjusted differentials from net income.

Thanks for your comments,


Victor Cook, Jr., New Orleans, Louisiana


Since your last post I've looked closely into business segment disclosures to follow up on your suggestion that I remove Citigroup's retail banking revenues and costs, as well as the market value attributed to them, from my analysis. I think you're right, it can be done.

First, interest expenses are not reported by segment. But they are so highly correlated with gross income (MS 0.99; JPM 0.99; GS 0.95; MER 0.96; and C 0.96 over the last ten quarters) that interest expense can be recovered with high reliability using segment net income as a percent of total net income. That would solve the "cost of goods sold" problem.

Second, as far as I can tell operating expenses by segment appear only in the annual report, so assumptions about their distribution over the year must be made. In addition, reported operating expenses include depreciation, which should be removed. Again, this could be done as a percent of net income.

Third, as you suggest, earnings per share could be used to allocate market value to each segment, though the correlation between the two is unobservable. So we don't know how much error this introduces.

Finally, the same adjustments must be made to JPM's numbers too, since they also have extensive retail banking operations.

While this can be done, I think it is best left up to a practitioner with extensive knowledge of banking operations. If you're interested in following up on this I would welcome your input.

As you will see in my post later today, I've addressed your questions about the advantages given to Citi (and JPM) compared with GS and MS as a result of the significant differences in revenues from businesses in which the latter do not compete. Eliminating Citi and JPM while adding LEH does produce a different picture of investment banking. In some ways it is "better" than the picture including Citi and JPM.

Thank you for your comments. I find them insightful and thought provoking. Best regards,


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