Dell: Why We're Not Buying the Rally

Dell Inc. (DELL) managed to trade above its post earnings high of $23.95, but we’re not buying the rally and the $24 level could end up marking a short term top after a pretty substantial run from the April lows that has largely priced in the beginning of a turnaround.

 

Some brief notes from W.R. Hambrecht’s Matthew Kather might help explain the skepticism. To start with, the recent earnings beat of $0.38 per share was not exactly what it was made out to be on an adjusted basis once you take out the severance, investigation and amortization costs.

He wrote that there were a number of positives including accelerated headcount reduction of approximately 7,000, emerging markets growth as well as strong growth in notebooks and servers. However, there are still doubts as to whether Dell can improve margins and execute on a disruptive IT services and global retail expansion strategy as well as a permanent lower cost mode while expanding its retail channel partners.

Although forward estimates have moved higher, it’s because of “more buyback assumptions and not due to any better COGS or Opex assumptions that we had previously forecasted.” Dell is still a wait and see.

Comments

[Calling theTurns]

You may want to think back whether you were "Buying the Rally" when Apple was languishing in the low teens and when a whole new paradigm/business model (which was just a glimmer at the time) around music and iPod was being revealed. Or how about when HP when it was already a bigger company than Dell, weighed down by the acquisition of Compaq, the subsequent destruction of morale and the stock left for dead in the mid-teens?
Turnarounds take multiple quarters and you do need some "blind faith," especially if you are an institutional money manager who needs to buy 10s of Millions of shares to build a position. If you wait till the turnaround evidence is very clear it is too late. Taking that little bit of "blind faith" is greatly helped when you are betting on the execution abilities of passionate founders like Steve Jobs, Larry Ellison (you may not even remember when Oracle was given up for dead in the early 90s), Michael Dell, etc. At $60B in sales and only 2B of shares outstanding, the leverage on each 1pt improvement in oper margin is enormous - there is enough low hanging fruit to go after. These are the qualitative reasons you need to buy into the rally. The quantitative evidence is also there - you just need to do the research.