The market reaction to Dell's (DELL) first quarter results devalued the company by almost $6B. Can the last analyst meeting change things?
The 1Q results were not terrible but with a technology company, almost every time that there is a slowdown, the market reaction is tough. Compared with the same period last year, revenues fell 4%, the gross margin fell 11%, the operating expenses climbed 1% and consequently the net income fell 33% to $635 million. Bad numbers apart, the company bought back 17 million shares, spending $300 million, and ended the quarter with $17.2B in cash and investments.
This is how the company ended the 1Q 2013:
| 1Q 2013 | 4Q 2012 | 3Q 2012 | 2Q 2012 | 1Q 2012 | |
| Revenues (millions) | $ 14,422 | $16,031 | $15,365 | $15,658 | $15,017 |
| Operating Income (millions) | $824 | $931 | $1,142 | $1,146 | $1,212 |
| Net Income (millions) | $635 | $764 | $893 | $890 | $945 |
| Total Assets (millions) | $43,289 | $44,533 | $42,043 | $41,604 | $39,788 |
| Long-term Liabilities (millions) | $13,118 | $13,615 | $13,161 | $13,074 | $13,288 |
| Total Equity (millions) | $9,357 | $8,917 | $8,663 | $8,336 | $8,370 |
| Shares Outstanding (millions) | 1,761 | 1,761 | 1,795 | 1,834 | 1,899 |
At the last analyst meeting, the company tried to demonstrate how it differentiates from competition and laid down its vision of the future. The new focus is now in Enterprise Solutions and Services, where they expect faster growth and higher margins.
Execution risks apart, the company delivered financial targets that can make a difference in the attractiveness of the current valuation. With $2B in cost reductions, more M&A, and if the current levels of cash-flow does not deteriorate significantly, the current market cap of approximately $21.5B may be an interesting valuation to start investing in the company.
If we assume the low end of the results of the last 5 years, and without considering the $2B in cost reductions, a relatively safe annual net income of around $2B shouldn't be hard to achieve (in the first quarter of the current year the company already earned $635 million). At current market prices, the price to earnings ratio (PER) would be at around 10 for those results,
So, in this case, the planned cost cuts are significant, in relation to the net income, and can take profitability to an interesting level at the current market price (PER would be much lower).
But with a technology company, we always have to be careful with any fundamental changes that can affect its business. Even so, if Dell manages to maintain the current levels of profitability (they expect them to improve), and deliver the $2B in cost reductions, this could be a good time to start investing and prepare to benefit in the future from the current transitional stage. And while we wait, there is now a dividend, and the stock buyback program is still active.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
