Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients following Dell's (DELL) disappointing earning's report yesterday, which caused the stock to drop nearly 7% in after-hours trading. Excerpts follow:
* Cloudy Message. While Dell's results were as preannounced, its outlook remains challenging in the face of slowing market growth and a diminished cost advantage. Further, Dell's strategy, execution, and visibility are lacking as 1) price aggression failed to materially accelerate unit growth, 2) pricing actions didn't drive sufficient demand elasticity (yet eroded profitability), and 3) Dell's ability to strike a better balance b/t growth and profits remains uncertain.
* Turnaround...Not Yet. Though Dell has opted not to issue guidance, a critical element of turnarounds is hitting or exceeding targets, and lack of visibility into Dell's outlook clouds our ability to measure its progress.
* Collateral Impact. With Dell's corporate op mgn declining to 4.3%, we see diminished risk of an industry price war as Dell noted its intention to stem profit declines, which is positive for HPQ. Dell's strong storage results (up 36% YoY) are positive for EMC, though continued inkjet unit weakness is negative for LXK.
* In-Line 2Q'07. EPS of $0.22 was in line w/ our/Street est. of $0.22 as revs of $14.09bn also met reduced expectations. Dell exhibited relative strength in non-US (up 11% YoY) and enterprise (storage up 36%, services up 21%), but desktops fell 4% and servers grew only 1%. Deterioration in op profit was alarming, as aggressive pricing and investments in service/support drove a 48% YoY drop.
* Lowering FY'07 Estimates. For the 7th time in a yr, we're lowering EPS for FY07 from $1.10 to $1.05 on revs of $58.0bn but maintaining FY08 of $1.20 as higher GM offsets lower revs of $60.8bn. For 3Q07, we're lowering EPS from $0.25 to $0.24 on revs of $14.45bn -- Dell didn't provide any guidance.
* Valuation Risk; Prefer HPQ. While value players may look at Dell, investors should change focus to Hewlett-Packard (HPQ) given a cheaper valuation (13x CY07 EPS vs. 19x for Dell) and stronger prospects. We see Dell fairly valued at $18-$19 using a 15x-16x P/E on CY07 EPS of $1.20.
DELL 1-yr chart:
For more on Dell, see the Conference Call Transcript.