Shares of Dell, Inc. (DELL) were trading between about $15 to $18 for most of 2012, and it seemed to be undervalued. However, after the company reported disappointing financial results, the stock plunged to about $12 per share. Here are 4 reasons why the stock might be a ripe buying opportunity for investors who have a mid to longer-term investment horizon:
1. Clearly investors are focused on the new "it" products like tablets, but it's way too early to declare that the personal computer is on the outs. For most people and businesses, tablets are a nice extra and well-suited for certain functions, but they are not a primary device for most applications. With limited keyboard functionality, tablets probably can never fully replace desktops and laptops. Even if Apple (AAPL) continues to dominate the tablet market, Dell is still likely to be very successful with personal computers.
2. Based on a number of valuation factors, Dell shares are just too cheap. The stock is now trading for about 6 times earnings, while the rest of the market is trading at an average of around 13 times earnings. The company has a strong balance sheet with nearly $14 billion in cash and just about $9 billion in debt. This type of balance sheet strength should support a higher stock price. The company has the money to buy back a large number of shares and in late 2011, it announced plans to expand the share buyback program by $5 billion, which combined with the previously authorized level of over $2 billion, creates a possible buyback of over $7 billion.
3. Dell is likely to be a major beneficiary of a possible upgrade cycle for computers in the coming months. Microsoft (MSFT) is planning a full-scale launch for Windows 8, which is the latest version of its operating system. Many businesses and consumers are likely to upgrade their systems and buy the latest computers from companies like Dell. The company is also likely to see a major boost in PC sales in the Fall, with back-to-school season, which will then be followed by holiday sales.
4. The lastest earnings report showed that revenues dropped about 4%, to $14.4 billion for the first quarter of 2012. Net earnings were 36 cents, which was down about 27% from the previous year. While investors never want to see a sharp drop in earnings, it was possibly just a weak quarter that can be improved on through cost controls and selling higher margin products going forward. Since many businesses and consumers know about the Windows 8 release, some of them could already be holding off on new purchases until it is out. This could be creating pent-up demand for Dell in the coming weeks as the company begins to sell PC's with Windows 8. Higher demand in the coming quarters could mean less discounting and expanded profit margins. The stock is clearly oversold and undervalued at just about $12. Investors willing to buy now could be setting themselves up for gains thanks to some of the positive catalysts that are looming for the company.
Key Data Points For Dell From Yahoo Finance:
Current Share Price: $12.22
52-Week Range: $11.80 to $18.36
2012 Earnings Estimate: $1.94 per share
2013 Earnings Estimate: $2.03 per share
P/E Ratio: about 14 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.