TECHNOLOGY TRADER: Dell by Bill Alpert
Highlighted companies: Dell Inc. (DELL), Hewlett-Packard Co. (HPQ), EMC Corp. (EMC)
Summary: Friedman Billings Ramsey hardware analyst Clay Sumner asserts in a report published Friday that Dell (DELL) has been manipulating its earnings by under-compensating for warranty costs; he claims Dell EPS figures have overstated earnings by $0.02-$0.08/share in five of the past 12 quarters. He accuses Dell of using warranty accruals to custom-fit earnings -- citing that while warranty claim rates have been relatively stable, accrual rates have varied wildly. Dell, he says, tends to under-accrue during poor seasons and over-accrue in better times, but the overall trend since Q3 2003 has been toward under-accrual. Warranty costs are currently 46% of its warranty reserve, well above Hewlett-Packard Co.'s (HPQ) 26% and EMC Corp.'s (EMC) 13%, and that Dell with its large corporate sales base (85%) should be more in-line with EMC that with HP. With actual claims rising steadily, he warns earnings restatements may be on the way.
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