Citigroup Recommends Buying Dell on Current Weakness

Dell Inc. (DELL) will incur another compensation-related expense in its July quarter, this one worth US$48.5-million for stock options granted to former CEO Kevin Rollins.

The company’s shares could see selling pressure on the news, but Citigroup (C) analyst Richard Gardner thinks investors should buy on weakness given expectations for catalysts in the near-term. These include the end of its accounting investigation, resumption of its share buyback plan, revenue acceleration, and cost reductions.

While Mr. Rollins’ 7.37 million in stock options expired on Aug. 2, they were not exercised since Dell cannot issue stock due to SEC filing delinquencies, Mr. Gardner said in a research note.

Combined with an initial US$50-million cash payment to 400 current and former employees for un-exercised options, the expense increase for the second quarter of fiscal 2008 is now nearly US$100-million, or US$0.03 in earnings per share [EPS], he said.

Dell management expects this will resolve all outstanding un-exercised option issues, and does not foresee any such payments in coming quarters.

Mr. Gardner’s second quarter EPS forecast is now US$0.29, while his fiscal 2008 target is US$1.43. His forecast for 2009 remains at US$1.84.

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