Looking to Buy More Dell

The Kelly Letter bought Dell at $29 two years ago. So far, we're down 15%.

When we bought it, Dell was trading at a price 31% lower than it had been 11 months prior, and looked to have established a bottom at around $30. Since we bought it, the stock has traded in a rough range from $30 to $22.

At Friday's close of $24.54, it's currently in the bottom third of that range. Dell shares fell 13% on Friday, following the company's 3Q earnings results. Profits were up, but by a penny less than expected and margins were down. Michael Dell said that his company is enjoying "solid progress" in its turnaround. He said the firm expects to be a leading consumer brand, grow overseas, and make enterprise IT easier. He wants designs that create "product lust" the way Apple's do.

There were several positives to help us feel good about holding shares. To me, the report was typical of a company still in turnaround mode, with nothing frightening at all.The company will begin buying back stock next week, an excellent vote of confidence in its future. Costs continue coming down. Retail partnerships are growing, a necessary step to compete with HP. That, combined with Dell's plan to roll out compelling new designs, should yield good results.

Michael Dell said in the conference call: "So with nearly 10,000 stores by year-end, we'll soon be at about 27% of the top retail doors globally. It's all about increasing a customer's opportunity to see, feel, and experience Dell products."

Also, notebook sales are roaring back to life. That segment is important because it's the public face of a computer company. It's where the logo is most often seen, the hardware that people notice in airports, and what shows up most frequently in movies, music videos, and other mainstream fare. It's at the heart of the "it's cool because cool people are using it because it's cool" cycle that consumer goods depend upon.

Michael Dell said: "We'll lead in the next generation of wireless, including WiMAX and 4G. We're shortening our development cycles and bringing products to market 40% to 50% faster, and as I've already mentioned, fantastic reviews on our latest new notebook products. When placed side-by-side against our competitors, our notebooks are second to none in performance, design, quality and simplicity."

I've long written that the vast majority of computer users have no idea what's inside, or care anymore. As with a car, the exterior is more important than the engine. Any modern computer can get anybody's work done these days, with the same keyboard, the same screen, and the same set of capabilities.

That leaves only price as a differentiating factor, right? That's what many analysts contend. They say that computers are commodities and that selling commodities is a crummy business. It's a losing proposition for all concerned because prices drop to rock bottom and every company loses.

However, introduce the concepts of branding and design and suddenly not all electronic goods are the same anymore. Ditto cars, whiskeys, and handbags. Any portable music player can play music, but you'd rather have an iPod. Any car will take you to the grocery store, but you'd rather show up in a Benz. Any whiskey tastes like whiskey, but you'd rather have Jack Daniel's or Suntory Hibiki (in my neck of the woods, at least). Any purse will carry a wallet, but you'd rather have a Louis Vuitton.

I believe Dell is creating the next must-have line of consumer electronic goods, a category in which I place the computer. That's the good news.The bad news is that its turnaround is taking a lot longer than I expected, and I think solid results are still at least a year away. Between now and Dell's "iPod moment," there will be more disappointments like we saw on Friday.

Chief Financial Officer Donald J. Carty said as much in the conference call: "...we are going to continue to incur one-time costs as we restructure to improve productivity and execution, reduce headcount where appropriate, and invest in infrastructure and acquisitions. In addition, our near-term results could be adversely impacted by a slower decline in component costs than we saw earlier in the year and a seasonal shift in mix to U.S. consumer and international regions."

The Kelly Letter will not look to double down on Dell anywhere over $24, and probably not until $20. I'm hoping for some disappointing results again that knock the price lower as those who don't understand what Dell's doing dump the shares.This is a common technique in the letter. We often build positions in turnaround stocks and average down once or even several times as the price finds a bottom. Eventually, the price heads back up and, as Bill Miller says, "lowest average cost wins."

While the letter is just watching Dell for the right time to buy more shares, we have an active order in place to buy shares of a company that's down 30% since we first bought. The last time we bought more shares of a company that was down 30% from our initial buy price, it recovered dramatically and is now sitting on overall gains of +27%.

Disclosure: Long DELL

Comments

[Premarupa:]

I do not quite agree with this rosy forecast. This is a far more risky "investment" than is generally understood. For those who were around then, remember Data General, DEC, Wang, or even more similarly, AOL. The correct strategy at this point is to cut your losses as well as possible. Here's what I wrote on Fool.com yesterday and last year.

" .. With apologies for posting negative news on a board that by definition is slanted towards bullish Dell, I have not seen anything change since last year. Disappointment of sort: somehow Dell found a way out of its accounting issues, esp. re: no reporting correctly the hidden subsidies it received from Intel.

If anything, Lenovo has grown even stronger, bold enough to drop the IBM moniker ahead of schedule. Lenovo laptops now rank tops in my personal research, service included; HP continues to execute smartly. And Acer is also growing. Services, servers? This is a crowded field, and I don't see Dell with any defining advantage - this is a people intensive field.

The reason Dell could not report advantages from reduced component prices is probably that they are already squeezing suppliers to the bone.

All that is left really is an efficient but increasingly less relevant production system and a brand name which only the uninformed turn to. Some of my technical associates no longer use Dell despite slightly lower prices because of poor support and unfixable issues, esp. for *nix uses. Businesses already using Dell have a harder time changing course, that is one of the only pluses.

The hardest part for humanoids is recognizing our own errors *and* acting accordingly. Nothing like Mr Market to teach us that lesson - and to make matters worse, humans are known to be far more stubborn in learning to change than monkeys or rats.

It took the market 4 years+ to recognize AOL's hubris. In Dell's case it may take less, especially in tougher economic times.
...

My post last year for more details is below boards.fool.com/Messag...

...my take is that Dell isnt ( hasnt been) for a long time a good company. I won't rehash the arguments here, only maybe for the record:

Dell isnt inventing much; its advantages are gone - (1) HP, eMachines/Gateway, Lenovo, etc all have streamlined their no-inventory procuction lines; (2) its special relationship with Intel is gone, for many reasons, mostly antitrust action from AMD - bottom line, Dell no longer gets preferential access to cpus and super discounted prices

Dell has been trying desperately to reinvent itself - it does have a short window of opportunity with the intel Core duo (short because AMD is coming next, cf the AMD board) - and did pretty good deal with AMD re supply advantage. Dell does have brand recognition, though that is declining (cf abysmal tech support). Still, how much does one want to gamble/invest on Dell as a reseller, kind of Walmart of computer things?

Finally -from personal experience- I have seen since last year Dell pulling tricks to make money AOL style ( order equipment, get instant 90 day no interest line of credit, get hit with 20% finance charge on the 92nd day because the accounts payable clerk never paid the $0.00 invoice with zero balance due but in very fine print the amount due later, AND the worst, spending hours getting the run around trying to talk to anyone at Dell.. best: from some Indian fellow: can I talk to your manager? .. I have no manager (true) .. end of story, my client never did pay these crazy charges, and Dell didnt respond to our lawyer .. pfft . .when a company has to resort to such methods to generate revenues, I say . .sell!

I much prefer HP (at least great engineering and R&D) and real business values instead. Not that they make all themselves either, smart, they do use Canon laser engines ..

Note added today (12/2/07) since last year HP has been about 30% higher than Dell and going stronger all the time.

2007 Dec 02 05:51 PM