Valuing Dell

Dell Inc. (DELL) beat analyst forecasts this week on the back of stronger than expected notebook sales and a lower cost-base. This has the company claiming that its turnaround plans are progressing well. (Read Dell's latest conference call transcript here.)

At Valuecruncher we decided to analyze what the improved performance means for the share price. We have used the Valuecruncher interactive tool for analyzing the company. That means that anyone can follow the below links and amend our valuation – if you want to see the impact of our assumptions you can.

Valuing Dell

Our assumptions are revenues of US$65.5 billion in 2009 growing to US$75.0 billion in 2011. We have used an EBITDA margin of 7% in 2009 rising to 7.5% in 2010 and 2011. We have used a terminal growth rate of 4.0%. We calculated that using a present value calculation with the growth rate dropping from 7.5% in 2012 to 3.5% in 2016. We used a terminal capital expenditure number of US$900 million. We have used a WACC (discount rate) of 11.5%.

Valuecruncher's Valuation of Dell Inc.

Our analysis gives a share price of $23.94 which is approximately 4% above the current share price of $23.06.

Summary

The results released this week are a promising initial start on Dell’s turnaround plan. Dell shares closed on May 21 at $20.01 and have risen 15% to $23.06 by May 30. Our analysis suggests there is slightly more value available in the current share price - but only a small amount. The information released this week appears to have been efficiently absorbed into the share price. Play with our assumptions - what does your analysis say?

Disclosure: None

Comments

[malach hamovess]

you guys seem right on target; i've held dell until this last pop and feel that they'll have to be a lot more positives to keep it where it is, let alone move it higher.

while everyone is congratulating Dell for a "smoothless" move into selling laptops in mass merchandise outlets, the harder reality is that the fight over wireless internet - 60 per month for unlim access" which is so profitable, may move the wireless cos like sprint & att to find a promo lightweight notebook - along the lines of EEE - currently selling for $300 as a teaser for a wireless internet contract.

with the inherent economics of scale in such business, it might be worthwhile to bring down the price to $50 per month on a guaranteed 2 yr contract. at such rates it will be easy to sell the notebook, particularly if the wireless internet is hardwired rather than by add-on card, as a complete computing package.

for many individuals (single folks, college students, hermits, etc) the combination of a computer with standard attachment to a large screen, mouse & keyboard, and printer while at home with constant access to the net will be all they could need.

it should scare the hell out of dell, hp, toshiba, and others which have constantly worked on making their computers faster, hold more, do more, etc. to justify maintaining that 550 - 700 price for basic laptops. A new breed of 7 - 10 inch portables with always-on internet connection could upset the entire distribution & sales scheme for all but the power users and those who do most of their work in a fully controlled environment.

this could kill dell, cripple hp, and otherwise turn the pc business into a marginalized operation for specialty users -- just what dell can't afford.

so enjoy a few good q's before the next wave washes onshore.

[BigJames]

In the near-term, Dell looks good from its channel fill in retail, but I wonder how it will look as its largest customer, EDS, gets acquired by HPQ. With 1/8th the profitability in consumer biz vs. commercial (EDS), they will need billions of incremental retail revs to offset potential losses at EDS. Is the recent retail channel fill indicative of sell-through? If not, how sustainable is their recent share gain.