Chicks Eye View: Unscrambling Monday's Egg

This week we will run another Chick held company through the Chicks Dozen (and we will continue to until we go through all the companies we own). Since Sun Microsystems just reported their earnings late last week, it made sense to pull them through today.

1. Buy What You Know - To tell you the truth, I didn't know anything about Sun Microsystems until Chick Lynn's daughter Jessica started working for them. Since I am very protective of my babysitters, I decided to research the company she was moving to California for. Turns out, I was using Sun Microsystems everyday and didn't even know it. Sun has developed computer languages called Java and Jini that allow computers and computer chips to talk to each other. Not only do we all use it, we are going to become dependent on it in the years to come.

2. K.I.S.S. - Sun believes that shrink-wrapped software will be the days of old, and everything you will need will be available through the network. Just like your telephone service. You pay so much a month for Telephone Service, so much Call-Waiting, so much for Caller ID, etc. Each of these is a software program, but is available to you for a monthly fee. This is where Sun believes the computer network is going and the languages that this new network will be using are Java and Jini. These languages allow things to talk to each other. For your computer to talk to your Palm Pilot, it needs a language. For your cell phone to turn on your coffee pot, it needs a language. Java is the most widely used language in the computer world, and also happens to be my favorite beverage. See? You've heard of Java before, now it just takes on another meaning. SUN also sells computer systems, high-speed microprocessors and a line of high performance software. Can you say, "Touch 'em all, David Justice?" (Thought I'd throw in a little World Series jargon.)

3. Industry - Eighteen years ago when CEO McNealy had his vision of the internet, everyone thought he was crazy. Things talking to each other? I can start my dishwasher from work?! My lawn sprinkling system will know if it is going to rain today and turn itself off. Isn't that amazing? This industry of developing the "Dot Com" home with other companies is going to grow tons in the coming years.

4. Leader in it's Field - Sun's two competitors, IBM (IBM) and Hewlitt-Packard (HP), can't compare when it comes to the numbers. Sun Microsystems is growing so much faster and has had consistently higher margins. If you want, you can take a look at the SmartMoney.com Comparison Chart. It seems that each quarter, Sun manages to steal more and more market share away from both IBM and HP. "We're coming to the view that Sun's server business has the same lock on the server market as Microsoft does on the desktop," wrote Merrill Lynch analyst Tom Kraemer. I'd pretty much call that the leader.

5. Repeat Profitability - Obviously, this network will be used over and over every day. I'm hoping that soon there will be a way to parent through my Palm Pilot. Can't you just see it... on my daughter's alarm clock, at 7:00 a.m., my voice saying, "Taylor Honey, time to get up. I'm in New York today, I miss you, but get your hiney out of bed Sweetie Pie. Your car pool is coming in ten minutes." If she dares to hit the snooze button, I'll try Plan B and pop into our video intercom system. "Hello and Good Morning everyone!! Taylor just hit the snooze button so could you please go in and turn her lights on??." Plan C... her CD player. There will be no escaping me. Me, over and over. Now that's some repeat profit for Sun who will have infiltrated all of my home appliances. I'm going to have so much fun.

Now on to the numbers portion of the Chicks Dozen. I found an excellent source of data at www.marketguide.com. Information available includes the Sun Microsystems Income Statement and Sun Microsystems Balance Sheet.

6. Gross Margins - (Revenue - Cost of Revenue) / Revenue

10. Increasing Growth - (Sales this quarter - Sales Last Quarter) / Sales last quarter

Everything looks pretty good for our Sun, but I did a little more digging (since Sun is my company to follow for our investment club) and I noticed a blooper. Look at Sun's numbers for the three quarters leading up to these latest numbers:

	October 2000	June 2000	March 2000	December 1999
Gross Margins	48%	52%	52%	51%
Net Margins	10%	12%	14%	13%
Cash to Long Term Debt	1.2x	1.4x	No debt	No debt
Flow Ratio	1.03	.92	1.09	1.1
Sales Increase	.6%	25%	13%	13%

Hmmm... perplexing isn't it? Every single Chick Dozen criteria moved in the wrong direction this quarter. We are going to have to keep an eye on SUNW next quarter to see if their numbers jump back in the right direction.

11. Strong Management and History - CEO Scott McNealy and some of his Stanford buddies started Sun back in 1982. The name SUN derived from Stanford University Network, so you know what they were doing in their spare time. In just 18 years, the company has become the leading global supplier of network computing solutions, with revenues of more than $14 billion.

You know I would only track a company whose CEO loved hockey. CEO Scott McNealy plays on five different amateur ice hockey teams. (I wonder if he could help the Calgary Flames this year?) McNealy is also a visionary. His idea of the Dot Com home is finally becoming reality.

Sun also believes that a company is about brainpower. One of Sun's Co-founders, Bill Joy, is about the greatest web brain in the industry. McNealy has referred to him as the "Edison of the Internet." If you are going to place a value on a company, you have to put a price on the brains that work there. This is more valuable than any property, or anything material -- the brain power. Sun gets this, and is continuing to develop the brains of its employees. So, on paper Sun is almost a billion-dollar company, but in reality it's worth much, much more.

12. Buy On Sale

That's it for this week's Chicks Dozen. Now go enjoy the World Series!! (If you are not a baseball fan, it's the season premiere of Ally McBeal tonight!)

*All numbers in millions except for Chick Dozen #12 stock price.