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Disney -- I really wanted to nominate this one, but I couldn't. The gross margins are really low and they carry a tremendous amount of debt. Both of these features could make things difficult if the company started to struggle a bit.

Schering-Plough -- To be honest, their numbers are probably the best of all the medical companies nominated. I always have trouble with this one because I don't have faith in the depth of their product pipeline.

Dell -- Another one with great numbers. But, again the low gross margins and the competitive nature of their business scared me away a bit. I think that these factors require this one to be watched a little more closely than the typical CK.

Okay, that's it. I'm anxious to hear from Tom, Al and Rob as well as the rest of you. I'm not 100% sold on all 5 of my finalists. Let me know why I should replace any of them with another candidate.

Phil
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>Dell -- Another one with great numbers. But, again
>the low gross margins and the competitive nature of
>their business scared me away a bit. I think that
>these factors require this one to be watched a little
>more closely than the typical CK.

Dell is a healthy, efficient, growing company, with the management team responsible for its success still at the helm. It's still innovating (pushing farther into the internet), and hiring like mad here in Austin.

Dell introduced a new business model, and everyone else in the industry (even IBM!) has been playing catch-up. Dell has pioneered online sales, actually making money off of this "e-commerce" stuff while everybody else was still just talking about it. If, by some stretch of the imagination they saturated the computer market, they could sell other products through their web site.

Dell has the same basic business model as Wal-Mart and Home Depot: sell what the customer wants, as rapidly as possible, in bulk, with low inventory and overhead. Dell took the wal-mart model and applied it to small high-value items, with a legitimate service component (integration and configuration into working computer systems) so they actually add value (and a brand name) to what they sell. Add to that the fact that the market for computers is one of the fastest growing markets there IS right now, and they're EXTREMELY well positioned.

Everybody has competition (even Coke), but the game is Dell's to lose at the moment. Dell has chased Compaq away from the high-end (high margin) server systems. If you think DELL has low margins, how do you expect Compaq to SURVIVE? Compaq is focusing on the cheapest of the cheap, selling systems with almost NO profit margin, to people who have never bought a computer before (can we say tech support costs?) And there's no company but Compaq even challenging Dell for the #1 spot.

I personally think the long-term risk/reward here is fairly nice. This is a growing market market niche that has never really been particularly exclusive. There are still many large players (Dell, Compaq, Gateway, IBM, HP). The only company threatening to put anybody else out of business is, in fact, Dell.

- Oak
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<<I personally think the long-term risk/reward here is fairly nice. This is a growing market market niche that has never really been particularly exclusive. There are still many large players (Dell, Compaq, Gateway, IBM, HP). The only company threatening to put anybody else out of business is, in fact, Dell.>>

Dell is a wonderful company, and I own more of Dell than any other company in my personal portfolio. But I'm not sure I'll hold Dell another 10 months, let alone another 10 years. There is nothing proprietary about what Dell does. Dell has a great brand name, but so do IBM and Compaq. Gateway has also start their version of a build-to-order strategy, as had Micron Electronics.

In short, everybody is trying to be like Dell, and many of the companies trying have far more resources than Dell has. I am absolutely delighted to be a Dell owner (and very thankful to the management and employees). I might buy more Dell stock in the near future, although I have no immediate plans to do so.

On the other hand, I can't see buying Dell and committing to holding it for 10 years in the absence of something extreme. Dell's business model is first out of the block, but it hasn't really been tested against competition. As it is, the gross margins are low, although the net margins are sufficient (and actually rising a bit). Let's see what the net margins look like when Compaq, IBM, Gateway, and HP are all selling most of their computers direct. If Dell's net margins are still 10%, then I'll probably still be holding my shares and I'll be all for bringing Dell into the CK portfolio.

Al
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<<Schering-Plough -- To be honest, their numbers are probably the best of all the medical companies nominated. I always have trouble with this one because I don't have faith in the depth of their product pipeline.>>

I just responded about SGP, but I should note that Phil probably knows a lot more about the depth of the product pipeline than I do.

Al
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If you think DELL has low margins, how do you expect Compaq to SURVIVE?

Yes, Compaq has low margins right now, but I'm talking about Dell rather than Compaq here.

And there's no company but Compaq even challenging Dell for the #1 spot.

When it comes to the direct purchase model, Gateway is actually closer as a competitor to Dell. I read an interesting article tonight talking about Gateway's recently announced plan to lease PC's in conjunction with providing internet access. IMHO there are some positives to this business model. Dell has dismissed it out of hand. It will be interesting to see what happens with it.

As I said, I don't deny that Dell is still a worthwhile investment, my pause for concern is that I don't view it as a buy and hold, put in a drawer (checking once a quarter) kind of investment.

Phil

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Schering-Plough -- To be honest, their numbers are probably the best of all the medical companies nominated. I always have trouble with this one because I don't have faith in the depth of their product pipeline.

As someone happily DRPing into both SGP and PFE, I agree with your worry about SGP's depth. However, monitoring the news over at qfn over the last year or so shows that SGP has an amazing licensing business going on, with agreements apparently started at beginning research levels. And who's to say that making progressive payments for research to outside companies (with niche expertise) where a licensing agreement is in place isn't a valid way to maintain the product pipeline? In effect, SGP is marketing its market development, distribution, and short accounts receivable time to small research organizations, thereby allowing each company to perform where they do well. Of course, SGP does have its own significant research budget. But let's face it, much development starts with university research leading to a discovery upon which the founder then immediately forms a small firm to capitalize on the discovery. The SGP model is ready to capitalize on the newly formed small firm.

Or so it appears on my $.02


Martin
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In effect, SGP is marketing its market development, distribution, and short accounts receivable time to small research organizations, thereby allowing each company to perform where they do well.

When I was in public accounting, Schering was one of my clients, so I know that there management is top notch, too. I am also aware of the large number of licensing and R&D type agreements that they have. The only thing is that many of the organizations that they are funding do not have a track record.

It becomes kind of like investing in development stage biotechs (where it can be hit or miss). Of course, the quality of SGP's management makes me think that they'll hit more than they'll miss.

Of the other companies I considered for inclusion in my finalists, this is the one that I could most easily be convinced to choose as a replacement for one of my other selections.

Phil
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