Citigroup Analyst: Dell Shares Are Oversold

Citigroup Global Markets analyst Richard Gardner said in a note to clients:

Shares of computer maker Dell Inc. (DELL) are oversold, and are now trading at a ten-year low.

Mr. Gardner said that the shares trade at just ten times his revised estimates for fiscal 2012 and eight times free cash flow. And despite the company’s warning of weaker demand in the United States (mainly small and mid-size businesses as well as state and local governments), United Kingdom and several other European countries, Mr. Gardner said:

In aggregate, we believe these markets represent [only] 15-20% of total revenue.

As for U.S. Large accounts and the U.S. Federal government - the company’s most profitable segments  - Mr.  Gardner said:

Dell management characterizes them as stable or pretty good.

In addition, when demand falters, Dell tends to shift to a strategy of maximizing margins over top line growth.  As Mr. Gardner noted:

This shift, combined with favorable pricing, should drive sequential improvement in gross and operating margins.

Mr. Gardner still expects earnings to be pretty close to his original estimates, but is lowering them slightly to reflect a more cautious view of end demand over the next 18 months. His target price has been lowered to $26 from $28, though it still suggests a “very favorable risk/reward.”

Dell shares closed yesterday at $16.19, up 1.3%.