Will Dell Take Advantage Of Hewlett-Packard's Rough Patch?

| About: Dell Inc. (DELL)

By Justin Dove

Over the past few years, Dell Inc. (NASDAQ:DELL) keyed on expanding its custom-order computer business into more of a one-stop shop for enterprise services.

Last year, Dell and Hewlett-Packard (NYSE:HPQ) even engaged in a buying war as they competed for 3Par, a company involved in data storage.

Dell continued to make moves to beef up its enterprise offerings in 2011 with the July acquisition of Force10, an enterprise networking company. It also released its first foray into enterprise cloud data-center services in August with its partnership with VMware (NYSE:VMW).

HP, however, is having a shaky 2011. It recently fired former-CEO Leo Apotheker after less than one year on the job. Apotheker saw HP’s stock drop as much as 56 percent in his tenure and the company missed its projections three times. He was fired shortly after announcing the company was exiting its mobile phone and tablet interests, plus possibly selling its PC division.

Although HP ousted Apotheker in favor of former-eBay (NASDAQ:EBAY) CEO Meg Whitman, the damage may already be done – according to a recent survey.

HP Enterprise Customer Satisfaction Survey

Technology Business Research released results on Tuesday of a September survey of 130 HP enterprise services customers with at least 500 employees.

The findings are eye opening for HP. Among the key findings:

  • Forty-six percent of the companies are less likely to purchase HP products and services. This sentiment rose to 53 percent for companies with between 1,000 and 4,999 employees.
  • Forty-seven percent of HP PC or mobile device enterprise customers, plus 23 percent of customers using HP servers, indicated they were shopping for new products or suppliers.
  • According to the survey, when asked which vendors customers may be considering as alternatives, Dell scored the highest with 12 percent. Acer and Lenovo (OTCPK:LNVGY) also made the list.

“These survey findings confirm what Dell has been hearing from CIOs, as many are now questioning if they have the right long-term technology partner for their business,” Tim Mattox, Vice President of Enterprise Product Marketing at Dell told EON.

The Deal with Dell…

Dell made $61 billion in revenue for 2010, however, its market cap is just $29.45 billion. That’s because the consumer PC business is fairly low margin. Dell’s profit margin is currently just 5.80 percent compared to HP’s margin of 7.30 percent. HP is also twice the size of Dell.

But this margin is on the rise for Dell, which is improving its operating cash flow. In the quarter ending on July 29, 2011, Dell reported total cash flows from operating activities” of $2.37 billion. That compares to $3.97 billion for all of 2010.

The move to more enterprise services means higher margins for Dell, which is also earning 50 percent of its profit from higher-growth overseas sales.

Dell also announced in September that it was buying back $5-billion worth of shares.

Dell Continues to Bring More Value to Shareholders

Although Dell’s stock isn’t likely to set the world on fire, it may be a bit undervalued. It’s making solid investments into diversifying its business and getting into higher margin areas. In its second quarter, Dell managed to increase enterprise solutions and services revenue by four percent year-over-year, despite consumer sales gaining just one percent. Its data storage business grew 15 percent, and server and networking sales increased by nine percent.

The New York Times even entertained the idea that Oracle (NASDAQ:ORCL) could be in the market to acquire Dell, although they note the price may be too high for even Oracle.

Is this something Oracle needs as it continues its seemingly relentless growth? With $62 billion in revenue, Dell seems like a company too big to acquire. But those PCs are so low margin that Dell’s market cap is just $26 billion, including $15 billion in cash on its balance sheet. The net price, though, is still about twice the $5.6 billion that Oracle paid for Sun in 2009.

Can Dell steal some of HP’s enterprise business and bring more value to shareholders? Only time will tell. Keep an eye on Dell’s third-quarter results, which are typically released in mid to late November. If the results are positive in the enterprise services area, this may be a good sign going forward.

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.