Dell Reduces Outlook, But Still Has Upside

| About: Dell Inc. (DELL)

Dell Inc. (NASDAQ:DELL) announced its quarterly earnings on Tuesday in the after-hours. The company generated revenue of $14.5 billion and earned 50 cents per share in the quarter. Analysts were expecting the company to generate $14.6 billion in revenues and earn 45 cents per share. For this fiscal year, Dell expects to earn $1.70 per share, a much lower figure than the $1.91 per share expected by the analysts.

The company's Chairman Michael Dell focused on the long-term transition of the company, rather than the short term goals, as he said: "We're transforming our business, not for a quarter or a fiscal year, but to deliver differentiated customer value for the long term. We're clear on our strategy and we're building a leading portfolio of solutions to help our customers achieve their goals."

In the computer business, the margins are getting more and more difficult to maintain, competition from Asian companies is increasing, and the demand for computers in the consumer side is replaced with demand for smart phones and tablets. Companies like Dell and Hewlett-Packard Co. (NYSE:HPQ) are seeing strong pressure to transform their business model and increase the amount of high margin services and products, such as consulting and software development, offered to their clients. Compared to the last year, Dell's revenues fell by 8%, and the company's net earnings fell by 18%.

The company also announced that it had hired Marius Haas, a former networking chief of HP, as the new president of enterprise solutions. Mr. Haas will replace Brad Anderson and Mr. Anderson's future with the company has not been clarified. Mr. Haas will probably be tasked with finding ways to slow down the company's market share bleed. Apart from the tablets and smart phones, two Asian companies - Lenovo and Acer - have been stealing market share from Dell and it is difficult to know when Dell's market share will hit the bottom.

Despite the profit, the company's cash reserves have been on the decline. Last year, in the same quarter, the company had $14.62 billion in cash and equivalents, whereas it had $12.81 billion in the previous quarter. In the second quarter of fiscal year 2013, the company's cash and equivalents fell to $11.52 billion. Also, the company's short term investments fell from $901 million to $372 million. Of course, the company's recent acquisitions played a role in this picture. The company's long-term debt level is practically flat compared to the last quarter (i.e., from $5.81 billion to $5.83 billion), however it is down compared to the last year (i.e., from $6.42 billion to $5.83 billion). The company's inventories are up significantly since last year (i.e. from $1.35 billion to $1.61 billion).

Year to date, Dell's shares are down 17%, whereas the S&P 500 index is up by 12%. Since February, the company's share price is down nearly 35%, whereas the S&P 500 index is up by nearly 5%. Dell has been underperforming the market by a large margin. Excluding the acquisitions, the company's balance sheet looks strong and the company has more than enough cash to cover all its debt and some more. If the company ends up earning $1.70 per share as per its guidance, and if we assign it a fair P/E ratio of 10, the company's price target in the next 12 months can be $17, indicating an upside potential of 42% to today's after-hours price of $11.97. The analysts have an average price target of $15 for the company. Given Dell's share price and low valuation, a lot of the issues in front of the company must be already priced in and the company's share price might be near bottoming.

While I don't see Dell growing much in the near term, I still see plenty of upside potential for the share price of the company, as the company's shares have been beaten up badly in the last several months. Even if the company returns to its normal valuation, this still indicates a lot of upside. At the end, if Dell's turnaround is successful, the upside potential might be even higher.

Disclosure: I am long DELL, HPQ. 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.