Dell: Market Pessimism Presents Buy Opportunity

I am glad the market in general has been giving such a doom and gloom view on Dell (DELL). Its stock price halved from $40 to $20 just 3 years ago. I think it’s great because it simply gives me the opportunity to buy into a good, if not great, company like Dell.

The Problem(s)

It’s true that Dell has not been competitive in the past few years, with Hewlett-Packard (HPQ) eating much of its pie. Their products were not attractive. Customer service actually sucks. Consequently, fast sales growth came to a screeching stop.

Dell's Solution

Since the departure of Michael Dell and his coming back not so long ago - and of course, with a couple of key employees leaving - things have changed. Significant things have changed indeed. Since this January, its Direct Model that has been the key growth driver has now been shifted to the retail model like other PC manufacturers. Additionally, Dell introduced new models that are more appealing to the masses.

The Results

It looks like the entire market is mispricing Dell despite all the good news I see. This keeps pushing it down further as it misses more expectations, similar to how the whole market misjudged the oil stocks just a few months back and allowed me to get in and profit from buying them at unbelievable prices.

I don’t know if Dell is a screaming buy. But at these prices, I would definitely accumulate more over time to build up position.

Dell’s Turnaround Strategy is Working

Even with US PC shipments growing at only 3 % last year, only Apple (AAPL) and Dell show double-digit improvements. Dell saw its U.S. market share grow by 15% to 31%. April figures from IDC and Gartner are showing growth of about 20% for the first quarter because of its retail channel initiative from its outdated direct model and a series of product revamps to bring back appeal to the masses. If I am not mistaken, some of its newly introduced laptops are running out of stock!

“Strength in Weakness” factor is one of the key factors I look for. A company that is able to outcompete others in a difficult environment is a sign of core strength. Sure, Apple is doing well, but I would not buy it at these valuation prices.

With global PC sales continuing to be very strong both in Asia-Pacific and Latin America, where both regions are growing at 19% last quarter, Dell is sure to benefit from this as more than 45% of its total sales come from outside of the U.S.

Among other factors that I think are good signals for long term growth is their strong stock repurchase program. In Q4 of 2008, Dell spent $4 billion to repurchase 179 million shares of common stock and intends to spend at least $1 billion to repurchase its shares in the first quarter of fiscal 2009. That’s about 10% of total outstanding shares. The outstanding shares have declined from 2.6 billion in 2005 to about 2.0 billion today. That’s down by 23% in over just 3 years. With the company generating at least 3.5 billion in free cash flow, I don’t see why this program will not continue over the next few years.

Valuations

Although Dell is priced at about 15x EPS, it’s at the lowest levels not seen in ten years, and I suspect that there is more room to go. But again, my take on this is that we never know if the stock will go further down. So it’s not a bad bet to put some in Dell today. If it goes lower, pick up some.

All the gears are starting to move in its direction.

Disclosure: Author holds a long position in DELL

Comments

[archman82011]

Dell 10 year stock price return= zero percent.

It is a stock from the previous 20 year bull market.

During the late 80's the personal computer revolution began. It picked up steam during the 90's and finished in 1999 when most people finally had a computer. Dell was part of that revolution selling tons and tons of personal and business systems.

Those days are over. They may have a presence world wide but they are not the only company out there that people buy from. Even if they manage to increase sales, the glory days are long over.

Dell may be a fine company, but the stock, as a vehicle to get hundreds of percent or thousands of percent return on investment.....
is finished.

Just ask any poor soul who has owned it for 10 years and is not a trader.

I have no position in the stock of Dell.

[David Lentz]

If you are looking for out of favor depressed stocks to pour money into, there's an entire financial industry full of them.

Just because a company has had a great past, does not mean that their future is similarly aligned. Just ask Microsoft stockholders. Or Bear Stearns. Outperforming is the key to advancing, and I see no distinctive competencies in Dell that are not in abundance in their competition.

Dell's problem is not, in the main, competition from Apple. It is that Hewlett Packard is chewing it up in its main market, corporate America. The stigma of poor service lasts long after the problem has been corrected, and Dell will have to significantly undercut HPQ in product pricing to get a chance to rise off the mat. I don't see HPQ giving them that much breathing space.

You will know if Dell's turnaround strategy is working when cash flow and profits improve. Dell's formula has always been built around maintaining minimal inventories, so even if they do run short of product for brief periods of time, it is not necessarily a sign of blow-out sales volume.

[KenC]

Yes, shipments were up, but isn't that primarily due to the initial stocking of retail inventory? I'd be a little careful and see if this is real growth, or just temporary growth due to the rollout of the retail initiative.

[ezduzit]

dell, a box maker with no technology. the chinese make the same boxes but much cheaper. as far as service, as of 5/12/08 when the dell dude didn't show, nuff said. and don't even put apple and dell in the same sentence. surely there are more pleasurable ways to lose money.
ps: i don't own a dell computer, never did, but my bank manager was crying to me about his dell tech support experience yesterday.

[MD]

Anybody who bought Dell when it was valued at 40x earnings deserves to sit on dead money for 10 years. It's quite amusing when shareholders that buy at these levels get angry when the stock price doesn't advance, even when companies are growing revenues and earnings like Dell has. Home Depot is an even more illustrative case.

At these levels, on the other hand, 8-10% revenue growth combined with slightly higher margins and share buybacks can deliver 15% earnings growth. This is about the level Dell is priced at these days. With better product design and good execution entering Asia, Dell could easily outperform low expectations going forward.

Steve
magicdiligence.com
The Best Magic Formula Stocks

[SuePi]

test>
> Steve
> magicdiligence.com
> The Best Magic Formula Stocks

[SuePi]

There is tremendous pockets of innovation and intellectual brain trust at Dell who understand what it takes to get beyond the box. This has been clearly demonstated by the recent aquisitions of ASAP, Everdream, Silverback and MessageOne in support of Dell's desktop virtualization, Unified Communications and remote management SAAS strategy. The problem is 3 fold old. 1) Dell has allowed a stale sales management team to remain in tact that includes one trick pony account executives who only know how to sell speeds and feeds vs. having solution based conversations at the CXO level on how they can solve real business problems. Until a business savvy sales force is put in place accompanied with a solution sales incentives program all the efforts in developing global customer integrated solutions will remain on the drawing board collecting dust. 2) The second problem is the hardware and services product groups are at constant war with each other on who should be leading the solutions development dance. For the last 20 years the product (hardware) group literally considered themselves demi-gods where the services product group was relegated to the childeren's table at Thanksgiving to be seen but not heard. Now that Steve S, Global Services President, is on board and sits on the ELT he brings considerable credibility to the table and has garnered almost rock star status along side MSD...maybe not that much but relatively speaking. At least services will be sitting at the Thanksgiving table come November and most likely at the "other" head of the table across from MSD by the December Holiday Season. 3) Finally, but not least of all by no means, Dell has failed on all fronts in its promise to hire, promote, develop, mentor and create an environment where talented women are willing to step up and be accountable for key P&L positions. Currently there is not one women on Michael's Executive Leadership Team. Organizational effectiveness study after study has shown that a diverse group of people are much more likely to bring about positive cultural and financial success than a leadership team that looks around the table as if it is looking in the mirror. Additionally, in Dell's push to save $3B in costs over the next couple of years remember boys think about the points outlined above and try not to throw the baby out with the bath water as the old saying goes. Maybe selling to a private equity firm is the way to go to get yourselves out of the spot light for a while in order to position yourselves for the next technology evolution.


On May 16 03:40 PM MD wrote:

> Anybody who bought Dell when it was valued at 40x earnings deserves
> to sit on dead money for 10 years. It's quite amusing when shareholders
> that buy at these levels get angry when the stock price doesn't advance,
> even when companies are growing revenues and earnings like Dell has.
> Home Depot is an even more illustrative case.
>
> At these levels, on the other hand, 8-10% revenue growth combined
> with slightly higher margins and share buybacks can deliver 15% earnings
> growth. This is about the level Dell is priced at these days. With
> better product design and good execution entering Asia, Dell could
> easily outperform low expectations going forward.

[pointofview]

I doubt the customer service area will get dealt with until the company is forced to merge, or sell at a bargain price to some vulture. Its a bit like xerox when they almost went bankrupt. Nobody listens to the customer in the meantime. Meanwhile, the customer base will erode at increasing speed, as the word gets around. I'd sell now, if I owned any stock.