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By: Brendan Gilmartin, VP Research, Selerity

Overview
Dell (
DELL) is scheduled to report 4Q 2012 earnings after the close of trading on Tuesday, February 21. The results are typically released immediately after the closing bell with a conference call slated to follow at 5:00 p.m. EST. Dell has made great strides in recent quarters, transforming itself by expanding into the enterprise market, delivering high-end server capability in the data center, along with cloud-computing and virtualization solutions.


Outliers & Strategy
Key Measures:

  • Non-GAAP Earnings Per Share: In the past seven quarters, this value was comparable to consensus.
  • Revenues. Revenues tend to track close to consensus estimates.
  • Gross Margin: This is a critical measure for Dell. Selerity extracts the "Non GAAP" figure. The "knee-jerk" reaction does not often take into account gross margins. As the results are digested, this measure typically gets close scrutiny.

Dell is expected to earn $0.51 per share (range is $0.39 to $0.58) on revenues of $15.94 bln, up 1.6% from the year-ago period. (Source: Yahoo! Finance).

Stronger than expected results last month from Intel (INTC) and Microsoft (MSFT) suggest PC end market demand remains strong.

Dell remains an attractive value play at 8.9x forward earnings and 0.53x sales, with a PEG ratio of just 1.67. The company is also sitting on $7.70 per share in cash which it is using to more aggressively repurchase stock.

Recent News
02/17: R.W. Baird downgraded Dell from Outperform to Neutral, asserting that the operating model may be peaking, according to a post on Barron's.com. The firm notes that Dell is likely to report a solid quarter, but that margins may no longer improve.

02/15: Sterne Agee downgraded Dell from Neutral to Underperform with a price target of $15, according to a post on Barron's.com. The report cited the increased competitive threat, coupled with dependence on personal computers. The analyst that made the call also told CNBC that Apple (AAPL) would continue to gain share in the PC market at the expense of Dell.

02/14: Greenlight Capital, run by renowned investor David Einhorn, picked up 14 million shares of Dell during the recent quarter, according to a 13-F filing.

02/02: J.P. Morgan upgraded Dell from Underweight to Overweight and raised the price target from $17.50 to $21, according to a post on Benzinga.com. The firm cited improved earnings and revenue growth, along with widening margins.

Technical Review
Dell shares have broken out in the past 6-7 weeks, gaining more than 24% over that span to a recent 52-week high of $18.33. But with the Relative Strength Index (RSI) now above the oversold 70-level, narrow candlesticks in the past week and an extended MACD, Dell shares could be in for a near-term pullback. Should the rally fade, look for initial support near the 20-Day SMA near $17.50, with further downside risk to $16.50, just above the 50-Day SMA. (Chart courtesy of StockCharts.com)

Summary
Dell shares recently broke out to a new 52-week high, as the company looks to be benefiting from the push into servers and growth in the enterprise segment, efforts to expand margins, evidence of solid PC demand, and a sizable investment last quarter from David Einhorn of Greenlight Capital. Despite the positive news, however, Dell has been the target of cautious comments from the sell-side stemming from concerns over margins and escalating competition. With that being said, Dell looks vulnerable to any missteps following the recent advance.

Source: Dell Rallies 25% YTD Ahead Of Critical 4Q Earnings Release On Tuesday