Will Michael Dell create the same turnaround that Steve Jobs did when he returned to Apple (AAPL)? Of course not; Apple needed a visionary to set the stage for innovative cutting edge technology. Dell doesn’t have much innovative cutting edge technology and hopefully they will stay that way. The company that Michael Dell built is all about business efficiencies, not innovation or cutting edge technologies. Michael Dell will drive this point home and help lower costs and gain a few points back on margins. In fact, Michael Dell has already sent out a company email saying he will cancel 2006 bonuses and reduce manager headcount. Additionally, Dell stated he wanted to shorten design cycles and focus on return on invested capital [ROIC], cash flow, and variable costs. In short, Michael Dell wants to return Dell to its bread and butter by focusing on the things that made Dell hugely successful in the first place, efficiencies and cost control.
Perhaps the most important thing that Michael Dell brings to the table is investor confidence. Any sign of business improvements at Dell will lead to a slew of investor optimism and analyst upgrades. The first upgrade came a few days ago when Credit Suisse analyst Robert Semple upgraded Dell to “outperform” from “neutral”. We expect this trend to continue which will help Dell’s shares in the near term.
When Michael stepped down as CEO in 2004 Dell’s stock was near $35 a share representing a market cap of about $70 billion. Since then Dell’s shares have slid about 32% and the market cap has dropped to $53 billion. During that same time frame revenues have increased about 32% and profits have increased about 35%. Not exactly terrible performance for Kevin Rollins, but these numbers lagged expectations and in recent quarters revenue and profit have been flat to down from last year.
At Dell corporate sales make more money that consumer sales and corporate sales have been soft for the last few years. The combination of a reasonably strong economy, softening energy prices, and the Vista upgrade cycle should help turn around corporate sales. Michael Dell is fully aware of this business cycle trend. By timing his return now, he will reap the benefits of a corporate buying cycle in addition to the cost improvements he will be implementing.
We will be the first to admit that we were wrong about the level of enthusiasm surrounding the Vista launch. This error led us to a poorly timed AMD trade last month. Fortunately, our relatively tight stop loss on AMD prevented this trade from having a big effect on our overall portfolio performance. Although, the Vista launch ended up being a non-event with the Fed and earnings reports taking center stage last week, we believe the Vista upgrade cycle will be alive and well for the next one to two years.
Recently, Dell received another headache in the form of an investor lawsuit. The suit claims that Dell received up to $1 billion a year in kickbacks from Intel (INTC), in return Dell kept Intel as the sole provider of CPUs for Dell computers. AMD (AMD) filed a similar suit against Intel a few years ago claiming that Intel had a monopolistic grip on the PC industry. Although Intel denies any wrong doing related to Dell, the AMD lawsuit still posses a legitimate threat to Intel and Intel’s monopolistic practices are still in question. That being said, both of these lawsuits stand to hurt Intel more than Dell. Although this lawsuit is clearly not a positive for Dell, we believe it will have a minimal effect on Dell going forward.
Michael Dell timed his return perfectly. Dell’s business would likely have improved with Kevin Rollins at the helm anyway due to the corporate purchasing cycle, but Michael Dell will implement the necessary cost reductions and he will get full credit for a turnaround at Dell. Dell is currently trading at the lowest multiple it has seen in its publicly traded history. Although the PC business is not the growth business it once was, we believe that with Michael Dell at the helm revenues and profits will increase, but the bigger effect on Dell’s shares will be an increased multiple. Investors are always willing to pay for great leadership, and when Michael Dell starts to show signs of improvement at Dell, the price investors are willing to pay for Dell will rise as well.
Our short term pick:
* BUY DELL under $24 (current price: $23.71)
* SELL DELL at $28, set stop loss at $21
DELL 1-yr chart: