By Nathan SlaughterAt this point, most investors are familiar with Dell (NASDAQ:DELL). Over the years, the company has built a strong reputation by eliminating the retail middleman and providing inexpensive, high-quality computers direct to the public.
Today, the Texas-based company is the world's leading direct-marketer of personal computers [PCs], shipping approximately 36 million desktop and laptop systems around the world annually. Additionally, the firm supplies servers, storage systems, software, printers, high-definition televisions and other related products.
Dell is no longer the growth story it was a decade ago, and the PC market has grown increasingly commoditized and competitive. For the first time, the firm's PC unit shipments (i.e. the number of computers sold) have been growing at roughly the same pace as the overall industry (rather than exceeding it).
Nevertheless, most would agree that Dell is still arguably one of the strongest companies on the planet, with annual revenues approaching the $60 billion mark.
According to research firm Gartner, the number of PC's sold in 2006 rose around +10% to reach 234 million units. Nearly one out of every six of those computers (and 1-in-3 domestically) was made by Dell.
However, sales growth in the mature PC business continues to slow, and analysts expect worldwide unit growth to slip to just +9% this year. And considering most of those sales will be primarily price-driven, overall revenues are forecast to be little better than flat -- topping out at around $200 billion.
Compounding that industry-wide slowdown, Dell has also been hit by a series of company-specific missteps: disappointing earnings reports, a massive recall of faulty laptop batteries, and an SEC probe into the firm's accounting policies. With this as a backdrop, the shares tumbled around -16% last year, extending a painful -29% slide from 2005.
Despite the pessimism surrounding the company, the competitive advantages that made Dell a worldwide leader are still in place today. Best of all, this prolonged sell-off has given value investors the opportunity to pick up this blue-chip stock at just 20 times trailing earnings -- roughly half its five-year average.
For all its troubles, Dell still boasts one of the most streamlined and efficient supply chains in the business, turning over its inventory every five days -- versus an industry average of fifteen. And as might be expected, the firm also reaps significant economies of scale from its size, leading to one of the highest operating margins in the industry.
Looking ahead, Dell will continue to penetrate rapidly-growing emerging markets, where revenues are projected to grow at twice the rate of those generated in the U.S. At the same time, there are signs that management has adopted more of a focus on profitability, rather than a "slash costs to gain market share" mindset. That strategic shift, combined with a more favorable sales mix (weighed more towards non-PC products), should lead to healthy margin expansion over the next several years.
Meanwhile, the highly-anticipated launch of Microsoft's (NASDAQ:MSFT) Vista operating system -- the successor to Windows -- should spur the sale of both PCs and enterprise systems, as consumers and businesses alike upgrade their systems over the next several years. In addition, the introduction of next-generation Blu-Ray disc drives should also help boost sales going forward.
Dell will remain a heavyweight in the PC industry. But as the company evolves and adapts to a changing environment, it will become much more than just a vendor of low-priced computers.
It may not be a smooth ascent, but eventually Dell should win over its critics and rebound towards our $38 fair value estimate.
DELL 1-yr chart
Disclosure: Author has no position in the above-mentioned stocks.