Dell Gets Ready for a Comeback - Barron's

Dell (DELL) is getting ready for a comeback, writes Barron's Jay Palmer, and patient investors could see the stock jump from its recent $8.61 to around $20.

Reading tech blogs and analyst research, one gets the impression that Dell is down and out for the count. The company's business has contracted, as has its share price. But don't dismiss Dell yet. It has $9.5B of cash, or $5/share, and if you back that out of the stock price, you're paying just $3.61 a share for a computer company that netted $2.5B in the fiscal year that ended January. Averaging 2009 earnings and projected 2010 earnings, and the P/E ratio is just under three.

Another strong point for the company is its CEO, Michael Dell, who has been at the helm for just over two years. He's busy building a turnaround strategy which includes new products and services as well as cost-cutting and which could give Dell the boost it needs.

Investors will need patience. As the global economy flounders, PC sales have plunged among both consumers and corporations and a further erosion in demand is expected. The corporate fall-off has hit Dell particularly hard, since corporate buyers account for almost 2/3 of its sales. Dell is also more exposed to the PC slump than rivals Apple (AAPL) or Hewlett-Packard (HPQ).

Executives have tried to keep the focus on Dell's cost cutting plans and the company's target of saving $4B through 2011. The move is long overdue as Dell, which once had a competitive advantage from low-cost assembly lines, must now play low-cost catch-up to rivals. Other turnaround efforts, including boosting higher-margin products and services, have had little success so far, which is why much is riding on Michael Dell's plan forward.

Richard Kugele, an analyst at Needham, says Dell would be well-served by expanding its core commercial market via the sale of higher-value software and services. But the only way it can 'really make itself over' is through an acquisition, with NetApp (NTAP) and Accenture (ACN) as logical targets.

Or perhaps Dell might become a takeover target itself. It has a strong brand, an entrenched manufacturing network and lots of cash, all of which make the company attractive.

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• Dell: Q4 EPS of $0.18 ($0.29 ex-items) vs. consensus of $0.26. Revenue of $13.43B vs. $14.18B. Raises 2011 cost-reduction goal to $4B from $3B. "Global IT end-user demand will continue to be uncertain and challenging." (PR)
• In January, JPMorgan downgraded Dell to Underweight from Neutral. High PC exposure could force Dell to "seek revenue offsets where incremental costs and competition could derail a return to margin stability or result in cash burn."
• Ockham Research calls Dell a "great value at these levels," adding "the downside risk here is minimal for the long term investor."

Comments

[Tom Shohfi:]

DELL has been "cheap" for so many years now, I've practically lost count. It was cheap under Rollins and is was even cheaper when Michael Dell came back two years ago. The company has spent billions buying back stock while shares have drastically underperformed peers. Dell is a great company with a tremendous history, but has been a terrible stock to own and there is little indication that this will change. The reason for this is that, even with Dell back at the helm, the company still has an identity crisis. It wants to be a growth company, but has seen only low-mid single digit top line growth over the past few years and hasn't been comfortable making big acquisitions necessary to get over the hump. It wants to be a value/efficiency type of company but doesn't issue a cash dividend and has only recently started really trimming expenses . If the company insists that it knows the best uses for its cash, history hasn't supported this claim. The PC and server industry has been fully commoditized and, while its peers like HPQ and AAPL have found ways to differentiate their products and services, DELL is still far behind. When they have a real, innovative plan, then maybe the stock will be ready for a recovery run.

Feb 28 01:22 PM

[Hayweed:]

Dell has 8.3 billion in cash .74 in short term investments
Dell has 8.3 billion in accounts payable and 1.9 billion in long term debt.

Thus the cash is spoken for and not $5 per share as reported. As Dell races to make cheaper and cheaper generic pc products they compete on price by using cheaper labor cheaper parts and less customer service. This is a disaster for the shareholder as market share is not what you want. Profit is. That is why apple with small market share has almost as much revenue as dell and 7 times the profit.

Buyer beware on this stock.

Feb 28 02:03 PM

[User 283977:]

Tom and Hayweed nailed it... Dell is marking time... they sell products based on generic parts. Dell's stock price moves with the economy. Buying Dell now makes no sense since Dell provides no dividend. If I was Dell, I would be looking very hard at virtualization.... That would put some wind in their sails...

Feb 28 02:32 PM

[spaceage:]

If I were Michael Dell, I'd shut 'er down and return the cash to shareholders. This company has become a disgrace with no core competencies other than box shifting and winning races to the bottom. Don't have false hope: this thing is dead.

Feb 28 02:38 PM

[j_remington:]

no upside = no reason to buy at fair value of $8

Feb 28 03:35 PM

[Zoltan L. K...:]

Dell doesn't have a uniqe business model anymore. The only USP they are trying to offer customers and shareholders is lowering costs. They are selling commodity PCs and it does't even help them in a downturn. That means trouble ahead. Trying to imitate Apple is another sign of strategic weakness. The cheaper computers get, the less relevant do little price differences get (in absolute terms) for the buyer.

Feb 28 06:00 PM

[davesmall:]

I have a much better idea. Buy Apple.

Feb 28 06:11 PM

[User 366634:]

I would like to buy a laptop from Dell but will not because of Vista. I wonder how much this is effecting Dell and others?

Mar 01 12:36 AM

[mollytjm:]

in a nutshell..what Dell HAD going for it was an appealing guy in an ad during a time when customer support was close to the top (Apple). As soon as customers started putting their $$ on Dell computers, the company sold it's tech support and customer relations to the lowest bidder. Things went from bad to worse and they lowered their prices. Dell no longer has the debt free cash to really innovate which is why this year's improvement is only color.

Now, people are catching on that if one buys a PC one also better buy virus protection...if they're even willing to put up with Vista. And where's their tech support? So it's not all that cheap.

During hard times, people move to VALUE. So those who can spend $ at all on a computer, want value for that money. There are cheaper computers than Dell, cuter computers than Dell and more highly rated, cooler computers than Dell. The only thing it really has left is name recognition. It's not that name recognition isn't important, it is... but it's pretty lonely without anything else to offer.
This company might somehow reinvent itself, but i wouldn't bet the farm on it.

Mar 01 10:10 AM

[User 366969:]

"Dell has 8.3 billion in cash .74 in short term investments
Dell has 8.3 billion in accounts payable and 1.9 billion in long term debt.

Thus the cash is spoken for and not $5 per share as reported"

>>>>>&g...

Payables are offset against Receivables.
Net Assets are $5.3B ... all cash

The original comment largely stands.

... although I do agree with the business comments.

Mar 01 10:19 AM

[DTEJD1997:]

There is NO WAY that Dell has $5/share in cash that is unencumbered.

According to Yahoo, Dell's book value is only $2.14/share. How can book value be SUBSTANTIALLY less than the "$5 cash" a company has?

Additionally, Yahoo financial is reporting that Dell's current ratio is only 1.3!
A vast majority of that cash would be eaten up paying off AP.

What has happened with all the profits that Dell has made over the years? Dell made tons of money in the 90's and early 00's. Why is book value ONLY $2.14 a share? I am willing to bet that this is due to MASSIVE STOCKHOLDER DILUTION. Employees and management got most of the money, not shareholders.

Mar 01 12:07 PM

[sleepy:]

More than all the profit that Dell has made from the start has been spent on buying back the stock that insiders were selling as their options matured. That's how Dell has net tangible assets of a billion or so despite tens of billions in past profit. So insiders have already taken all the money - the cash that remains is borrowed.

The Wintel glory days are over. Dell and HPQ have gutted their companies in a drive for efficiency. Possibly a winning strategy in a growth market, but potentially suicidal in difficult times.

Mar 01 01:59 PM

[PeteK:]

DELL is NOT reday for A Come Back, Period.
Maybe ready for more fallback.

Mar 01 02:56 PM

[agd108:]

Dell has a unique offering for servers and laptops and server equipment such as LANs. They should reduce the variety on their consumer front i think and concentrate on high quality corporate offerings. Of course volume will decrease with the slowdown so they may want to reduce variety across the board.. Their servers are still high quality when you are looking at blade equipment. And they have a solid laptop line. I don't think HP has the quality they have.

Mar 01 02:56 PM

[Jan Baker:]

Did you know that you can install Windows XP or whatever on a Vista machine? You just have to own the version of Windows that you want.

I believe my son's new Acer laptop might have lost something somewhere, as it was "designed for Vista," as someone said when he was in the process of making the switch, but he hasn't discovered it yet.


On Mar 01 12:36 AM User 366634 wrote:

> I would like to buy a laptop from Dell but will not because of Vista.
> I wonder how much this is effecting Dell and others?

Mar 01 06:02 PM

[Jan Baker:]

I had such a tussle with Dell Mexico that it had to be the worst customer relations ever. I bought a machine on their Dell Mexico website, and got a receipt, but when I checked my credit card sales, they'd charged me thirty bucks more (three hundred pesos, sorry). When I called, they said, Well, we changed the price. Of course I protested, said 'you can't do that, I have a receipt for the original amount, you can't abuse someone's credit card numbers like that, I only authorized my card to be debited for your on-line price,' etc. And after that they didn't answer my e-mails, and everyone had voicemail, no one ever answered their phone, and no one returned my calls. It took me six months, and I had to appeal to a friend of a friend (discovered accidentally!) in US Dell's upper ranks to make a special phone call. I finally got a refund for the thirty bucks.It was horrifying. If it's okay to charge thirty bucks more, why not three hundred bucks more?

But it took everything to get it. I've heard similar horror stories from here in the states. Management like that just can't make it. I'll never buy another Dell. But it was such a great marketing concept!

Mar 01 06:11 PM

[Jimbot:]

That's a funny one. AAPL is worth far more than Dell, and I believe they have about $27B in the bank. Dell couldn't afford AAPL. AAPL could afford Dell, though.


On Feb 28 06:11 PM davesmall wrote:

> I have a much better idea. Buy Apple.

Mar 01 11:12 PM

[Kris Tuttle:]

Dell should be preparing for a comeback but it's not yet clear how they are going to get there. I agree with some of the other comments that they need to address quality and branding issues even in their core market. Fast and cheap is something everyone expects and mostly gets delivered.

They are at a critical juncture though. As companies like HP and Apple get stronger it's harder for Dell to find breathing room. Although Dell has made some moves it's still largely defined by the past.

I think Windows 7 may help put a little wind behind their business for a change but with that they need to chart a faster course than their competition, something they haven't done in some time.

Mar 02 11:16 AM

[ba1210:]

Yuu obviously haven't compared quality. HP is an engineering company that engineers the best products by a mile. Dell doesn't make their own printers or blade servers. They are OEM products dumbed down to be cheaper. They notebooks are plastic and their batteries catch on fire. To say Dell makes better products is just not well researched. They strategy is to make products just good enough.

On Mar 01 02:56 PM agd108 wrote:

> Dell has a unique offering for servers and laptops and server equipment
> such as LANs. They should reduce the variety on their consumer front
> i think and concentrate on high quality corporate offerings. Of course
> volume will decrease with the slowdown so they may want to reduce
> variety across the board.. Their servers are still high quality when
> you are looking at blade equipment. And they have a solid laptop
> line. I don't think HP has the quality they have.

Mar 02 11:34 AM

[kris23:]

I'm not exactly sure DELL is ready for a comeback anytime soon. It says it in the article- PC sales have plunged. Dell is more exposed to the slump that rivals Apple and Hewlett-Packard. Regardless of what they have on the books, if consumers (or corps.) aren't buying their product, they cant necessarily have a comeback. Investors have been patient long enough and it seems they have finally had it. Sentiment dropped and is becoming extremely bearish (www.predictwallstreet....) and has been down for a few days. Investors just don't have the confidence in Dell right now.

Mar 02 03:49 PM