Dell: Back on Track

| About: Dell Inc. (DELL)

Dell (NASDAQ:DELL) was once a supreme corporation that made top of the line desktops, laptops, etc. Dell's founder, Michael Dell, was the CEO and for a while, things were going great. That all changed a few years ago after a report came out that Dell had been using known faulty parts in their computers sold to the public.

Then, in 2007, Dell was investigated by the SEC on false accounting statements and customer service issues. Needless to say, Dell took a hit. On top of that, competitors Hewlett-Packard (NYSE:HPQ), IBM (NYSE:IBM), Apple (NASDAQ:AAPL) took advantage of Dell’s weakness and took market share using lower prices and incentives.

In the last year or so, Dell has gotten its act back together and realized that customer service and innovation through acquisitions are the only way to get back to the top. Dell last year bought Perot Systems for $3.9B. In 2008, it bought EqualLogic for $1.9B. In 2010, Dell made an acquisition that have been very important to Dell’s future success: Boomi. Boomi is huge because it means that Dell is now in the Cloud Computing business, which is absolutely on fire right now. Unfortunately, Dell lost the bid war for 3Par to HP but ultimately, HP overpaid for 3Par.

Now, Dell has a new positive on its side: Bush Tax Cuts. A new provision was added to the tax bill that allows business to write off 100% of equipment purchases till the end of 2011. This gives Dell the opportunity to make more purchases and grow its business. Dell is in the best position to profit from this new provision in the tax law.

Dell's CEO, Michael Dell, recently bought $100M worth of Dell stock. That's about 7.4 million shares; the CEO’s total position is valued at $3.5B or 263 million shares. Michael Dell recently said in an interview that he believes Wall Street has not valued the company fairly. Believing investors will soon turn bullish on the company, he acquired more shares.

Dell’s recent results, announced in October, showed 3Q net income rose by 144% to $822M. Management said the results were due to IT upgrades. Also, 3Q revenue rose 19% from the previous year, based mostly on an increase in corporate orders. However, household spending on PC and laptops were weaker than expected. Dell’s next earnings announcement is scheduled for February 15, 2011.

Fundamentally, Dell is undervalued with a forward P/E of 9.44 and a PEG of .82. Dell also has a Price/Sales of .44 and a ROE of 34.5. Although Dell lags in price/cash flow and price/free cash flow, cash flow is expected to turn in the next year.

Now is a great time to buy Dell because they are now repositioning themselves for success and recognizing that customer service comes first. Building a reliable customer service system will help reoccurring sales, thus raising more income and revenue. Dell should become stronger this year, and then see the results over the next 5 years. I believe the results will be great. Not to mention, shares are pretty cheap.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.