Dell Inc. (DELL) reported earnings after the market closed on Tuesday, February 19th for the 4th quarter and fiscal year 2013. Revenue for the year was $56.9 billion, down 8%, operating income was down 23% to $4 billion, and EPS of $1.72 for the year was down 19%. The company continued to execute its long term strategy in fiscal year 2013 and made over $5 billion of investments to improve its enterprise solutions, services and software businesses. The fourth quarter saw revenue fall 11% to $14.3 billion and year-over-year margins and profits were down almost across the board at Dell. The only business line to see year-over-year growth in revenue was Servers & Networking which benefited from the acquisitions of Quest, SonicWALL, AppAssure, and Scalent.
In the earnings report, Dell declined to give any forward guidance for the first quarter or the fiscal year because of the pending buyout offer. Furthermore the company asked analysts to limit themselves to one question with no follow-ups keeping the earnings call to less than 30 minutes. Michael Dell did not participate in the earnings call. Interesting the people making the buyout offer have this information yet the current owners of the company who are being asked to sell their shares are not even provided with any guidance on revenue or earnings for the upcoming year.
Michael Dell's offer to buyout Dell has been well documented and debated. So has the fact that this buyout offer comes as the shares were trading at less than half the level they were at when Michael Dell returned to lead the company in 2007. Also the company has used cash to buy back shares at prices as high as $18 per share in the past year. Dell has also not been shareholder friendly, with cash on the balance sheet of over $12.5 billion and a dividend payout ratio of less than 20%.
In Dell's customer business units the consumer, small and medium business, and large enterprise units all saw sequential growth but year-over-year declines. The exception to this trend was the public sector business unit that saw a 9% decrease in revenue both year-over-year and sequentially. Dell cited U.S. Federal spending as a large driver for the weakness in this space but it was not the only challenge to this segment as this segment has exposure to a range of global governments and educational institutions. Growth markets were particularly weak for Dell with revenue falling 11% in the quarter driven by a 24% decline in India, a 20% decline in Brazil, and a 3% decline in China. Management indicated that only China was seeing sales stabilize and sales in other growth countries were being negatively affected by exchange rates.
I believe the LBO will not be successful as large shareholders have already aligned against it. With that said the stock bottomed in November before rumors of a buyout started circulating. The low came in mid November at just over $8.50 and the stock had climbed over $11 by the start of year, a gain of over 25%. The question is if the LBO falls apart does that November low hold, and if not how low will Dell's stock fall? If this deal falls apart could Dell end up like Yahoo! Inc. (YHOO) after it rejected Microsoft Corporation's (MSFT) offer and resume its fall? I believe the answer is yes.
A turnaround at Dell appears to be a long shot at best and return to the company's glory days of the late nineties is not even on anyone's radar screen. The problems at Dell began when its customer service, one of the main reasons people bought from Dell, started to fall apart. By the time Dell was trying to turn things around computers had gotten better and people had gotten better at using them so the customer service was not a big selling point anymore. The other sweeping change that has affected Dell is computer costs, capabilities and how people use them. Dell once offered a way to custom order a computer costing thousands of dollars. By making choices on RAM, hard drive space and speed, processor speed, and many other aspects of the computer you could build a machine to your own needs and price point. Now you can go into any electronics store and for a few hundred dollars buy a computer that can meet the needs of almost anyone. On a computer costing less than $500 I have 12 websites open in two different browsers, 3 Excel files, 2 Word files, Outlook, and the calculator plus Dropbox is uploading a 250mb file in the background. All of that and the possessor is running at 12% and less than 70% of the RAM is in use.
Dell looked at this and has decided to focus its efforts on enterprise solutions with PCs still playing an important role. However I believe Dell's lack of focus on PC's undermines consumer's faith in the company. Why buy a PC from someone who does not really want to be in that business anyways. If people are buying computers from Apple Inc. (AAPL) or someone else at home, don't be surprised when they are not buying from Dell at work either.
Dell's valuation compared to its peers reflects the fact that without the offer from Michael Dell propping up the shares it is overvalued. Its PEG ratio of 0.89 is the second highest in the group, trailing only Cisco Systems, Inc. (CSCO) and is 60% higher than Apple's PEG of .54. Dell's dividend yield is 2.3% compared to Hewlett-Packard Company (HPQ) with a yield of 3.1%. Furthermore HP's forward P/E and EV/EBITDA ratio are significantly less than Dell's.
In conclusion Dell might be one of the worst large tech companies to invest in right now. In placing your bets on this company it might be worth considering the short side. This could be done using options; you could buy a January 2014 call with a strike price of $13 for $1.15 and then short the stock at current levels. With that combination you would start making money if the stock fell below $12.69 per share. Additionally you could buy January 2014 puts with a strike price of $10 for just a few cents per share.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com