Almost two weeks ago, I posted on the resurgence of Hewlett-Packard (NYSE:HPQ) and the company’s success in becoming the number one PC seller, passing Dell (NASDAQ:DELL). Today I will comment on Dell, which by some historical metrics can be considered undervalued.
Dell has a price-to-earnings [PE] ratio of approximately 19, which is in line with the broader market, but is historically low for the company. The price-to-sales [PS] ratio is approximately 1, which is lower than the S&P 500 and that of its competitors. Dell’s stock closed yesterday at $26.17, giving a market cap of approximately $58B. The stock has recovered from a low of $18.95 this past summer, but is still down about 40% from its recent high of about $42 two years ago.
Dell has impressive scale, reporting a number one market share in combined sales of desktops, portables, and X86 servers in the U.S. and number two worldwide. In the U.S., Dell self-reports a market share of approximately 44% of the education market, about one third of the government market, and 43% of the large business market. Dell captures a smaller share of the home and small business markets with under 30% of both. Both markets have recently seen weakening due to stronger competition from Hewlett-Packard, Apple (NASDAQ:AAPL), and Asian manufacturers such as Acer, Lenovo (OTCPK:LNVGY), and Toshiba (OTCPK:TOSBF). Dell’s rate of market share increase in the U.S. has also slowed, with only a 0.2% increase from 2004 to 2005 and a possible decrease this year.
Dell’s operating and profit margins are also lower than during the dot-com (and tele-com) boom years. From 1996 to 2000, Dell’s operating margins ranged from 9.4% to 11.8%, while the company’s net profit margins ranged from 6.8 to 8.0%. From 2001 to 2005, the operating margins ranged from 8.1% to 9.3% and net profit margins from 5.7% to 6.8%. Clearly, Dell is not performing as well as it used to.
The competitive environment has changed for Dell. The company has expanded rapidly in the past, taking market share from its competitors around the world. Dell’s worldwide share was 2.7% in 1994 and 18.2% in 2005. The competition has since improved, the customer has changed, and some of its markets have matured.
Dell has a strong balance sheet with $8B in cash and only $0.5B in total debt, giving Dell the ability to correct its current problems. Although Dell has taken steps to improve its performance and may also benefit from the recent release of Microsoft Vista, I am not sure the company will return to its high growth past. Granted, even a 0.5 – 1% improvement in margins will result in higher profits and possibly better stock performance. Dell, though, is under investigation by the SEC and must still file two quarterly reports, making an investment in this stock a riskier proposition.
Disclosure: The author does not have a position in Dell at the time of writing.
DELL 1-yr chart