For Dell (DELL), the issue is not the past but the future. As the company attempts, smartly, to push out of the PC segment and transition into a full-service IT support and solutions company, the street is unconvinced they can pull it off. Currently trading at a P/E of just 6 and having announced a small dividend that, at current prices, works out to 2.9%, the market is severely discounting their ability to pull off a transition to a new look. They are forecasting a difficult couple of quarters and have lowered earnings guidance for the year to $1.70 per, down from $1.90.
Having recently gone on an acquisition spree, 14 to be exact, to achieve this they have drained their cash to their lowest levels in years. This has the credit markets spooked. The CDS spread on their debt has risen to near junk status putting them on par with most of the major banks. Five-year Dell debt is trading at 260 basis points. Morgan Stanley's (MS) are trading at 316 (August 28, 2012, quotes for both), which is down significantly from March. Dell has $3 billion in debt maturing in the next two years, which will consume a good portion of their cash flow along with the dividend ($~555 million annually). At this point, with $11.9 billion in cash and short-term equivalents, the business is only worth $6.6 billion.
PC makers like Dell and Hewlett-Packard (HPQ) are facing serious problems in their retail business from slowing sales along with stiff competition by Lenovo in the one market that they feel there is still significant growth to be had, China. But Lenovo is literally eating their lunch there as Chinese PC buyers are showing loyalty to local brands. While Dell and HP are failing to hold onto sales (15% drop in revenue in the BRIC nations), Lenovo is reporting year over year revenue growth of 35% and similar unit sales growth.
But, that story is well known. Where the light is at the end of Dell's tunnel is in their Enterprise Solutions & Services division, which now accounts for 29% of total revenue up from 23% in FY08. Dell is not seeing revenue growth overall, but rather a re-shuffling at this point of the way their revenue is generated. The higher margins from the non-consumer divisions are where their story will live or die. For a company that is supposed to be dying, their operating margins are better now than before the fall of Lehman Bros. in 2008, 7.1% GAAP in FY 2012 vs. 5.6% GAAP in FY 2008. Their debt servicing and restructuring costs so far are overwhelming any increase in operating margins.
It will be with Microsoft's (MSFT) Windows 8 and the mobile devices built specifically to work within the enterprise space that Dell can succeed. The problem, of course, is that is a terribly crowded space. At this point, however, HP is a mess and IBM (IBM) has left that portion of the market to players like Dell. It's not business they're interested in.
The future for Dell looks to be at best slowly expanding margins on flat revenue growth through a mix of cost-cutting and de-emphasizing commodity manufacturing and support. This may be a case of it being as bad as it is going to get. They have their plan and they've placed their bets and speculative investors may want to place theirs. There is a lot of action in January, 2014 calls. A positive end to 2012 or even Q1 2013 would make these $15 - $20 calls a very compelling trade. One could sell short-dated calls to offset the cost and accumulate cheaply while waiting to see if management can increase Enterprise market share.