Should You Buy Into Dell's Turnaround?

 |  About: Dell Inc. (DELL)
by: Aaron Murdock

Dell Inc. (NASDAQ:DELL) beat on earnings per share when it announced after the bell Tuesday August 21st but disappointed investors with the rest of its report. The company earned an adjusted 50 cents per share when analysts had been looking for 45 cents per share. However net income for the quarter slid almost 1.7% year-over-year as revenue fell 8% to $14.5 billion, just below analyst estimates for $14.6 billion. Revenue in the consumer segment was particularly weak, falling 22% and generating just $14 million in operating income. Furthermore revenue from the public sector fell 6% and revenue in the large enterprise segment was down 3%. Enterprise Solutions and Services revenue increased 6% year-over-year lead by a 14% gain in server and networking revenue. Perhaps the most disappointing part of the earning release was guidance for full year earnings of just $1.70 per share, when analysts had been forecasting $1.90 per share.

The company sees the high growth rate and better profit margins in the enterprise solutions and services business as its future. However, in the meantime the company still depends on desktop and notebook sales for roughly half of revenue. Furthermore the company's lack of success in the consumer market does not leave investors confident in its ability to execute in these new ventures.

Michael Dell returned to Dell to turn the company around and with over $14 billion in cash on hand it is likely that the company will be able to find some success. So far this year it has completed 5 acquisitions and is expected to close a sixth in the next quarter. I believe turnaround for Dell will be an uphill battle. Michael Dell once led the company to become the largest PC maker with a direct to consumer business model and lightening fast inventory turnover that kept only the latest technology in stock and at the lowest possible prices. There will be plenty of competition along the way and Dell's execution of will be key.

The longer term chart of Dell shows the fall of the stock and also points to a turnaround that has yet to takeoff, if it ever will. While the stock has moved higher at times over the past 3 years, those moves have been short lived as the stock has headed lower. The nearly 5% slide in the hours after the company's disappointing guidance put the stock below support around $12 per share. This breakdown could send the stock down below $9 per share and a test of long term lows from early 2009.

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I would steer clear of Dell for the time being. The company is a long ways from a turnaround and still has many questions facing the turnaround prospects for success. It will also suffer from the underperformance of the PC segment as it continues to lose market share.

Data sourced from: Company filings, and Yahoo!Finance. Chart from:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.