Dell Impresses In Report, But Now Appears Fully Valued

Several firms comment on DELL (NASDAQ:DELL) after the company released better than expected results last night:

- Cowen notes that saying that they are surprised by the company's 1Q08 performance is an understatement. Dell achieved almost record results, or at least what they'd characterize as a record q/q performance, even in comparison to the best of times. The last time Dell had 19.5% GMs, up 240bp q/q, was seven years ago in 11/00. Even when OMs were getting close to 9% in 2005, a peak, GMs were only 18.6%. EPS of $0.34 was $0.08 above FC. Dell attributed the strength to component price declines (50% of benefit), a richer mix of biz (25% of benefit and a 14% higher ASP y/y) and smarter pricing (25%). Servers, up 19% y/y, storage 13% and NBs 7% all aided ASPs. Pointing to another record, during the past eight qrts server growth was usually 3%-9%, and didn't even break DDs in FY07. Apple saw component pricing benefits, but Acer, Gateway and HP did not. But Dell pointed to unsustainably high GMs, as component price benefits will abate in the 2H. Dell made solid progress in its turnaround efforts this qtr, way ahead of expectations. However with the shares at 18x FY09 est, the firm retains Neutral rating.

- Baird maintain Neutral rating on shares of Dell following a relatively strong April quarter,driven by more disciplined pricing/sales practices and very favorable component pricingenvironment. Dell also announced a 10% headcount reduction, which they believe provides further operating margin support amid likely GM headwinds. The firm does not recommend investors chase the expected strength given what they believe is a fairly full valuation, slow growth outlook, and anticipated increases in business complexity (retail, R&D, acquisitions, services, etc.).

- Morgan Stanley is shifting to an Equal-weight rating (from OW) on Dell shares as they believe the stock now better reflects risk:reward of their turnaround thesis. At 15x FY09 EPS of $1.80, Dell now trades above other systems vendors (e.g. HPQ and IBM) that arguably have better execution track records. And while the April quarter was consistent with firm's turnaround thesis, some of the positive dynamics are unlikely to persist in the near-term. MSCO expects the stock to trade up off last night's positive earnings surprise and recommend investors be opportunistic in taking some money off the table at these levels.

-- Eric Ross from ThinkEquity:

The firm notes they applaud its strong quarter. No concrete guidance was provided. Despite its success in beating the financial forecast, the near-term outlook remains challenging: cash flow generation (negative in the quarter) is likely to be permanently lower, margins will likely shrink, ASPs are unlikely to see such a sharp rise again, component prices are not likely to seecontinued declines, and U.S. Federal business is typically lumpy

U.S. Federal sales were the biggest driver of revenues. This appeared to have turned on suddenly after many weak quarters.

Higher ASPs drove better-than-expected revenues—a 14% Y/Y increase—this, frankly, was a real surprise for all the investors and supply chain reps with whom the firm spoke.

The loss of $200 million in cash flow was due to accounts payable, and even if the cash flow bounces back to generation, the company is still generating less cash than it had historically.

Maintains Sell and $20 tgt on DELL.

Notablecalls: Pretty good performance by DELL. Yet, component pricing may not hold near current low levels. Not going to make a call here, but considering DELL trades around equal valuation to HPQ, I don't see much upside here.

DELL 1-yr chart: