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Mayukh Mukherjee's  Instablog

Mayukh Mukherjee
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Interested in technology and financial markets. Undergrad in engineering, MS in Comp Sci and an MBA in finance. Building tools for individual investors to make more informed decisions about the stocks and mutual funds they choose. Investment style: Identify businesses that have long-term... More
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  • Dell Deserves A Closer Look

    Current Price: $9.50
    Fair Value Estimate: $13.50
    Margin of Safety: $10 - $18
    Date: November 8, 2012

    The key drivers for long-term stock appreciation are:

    • A very conservative intrinsic valuation points to a fair value that is at least 30% higher than the current market price. (See valuation grid at the bottom of this note)
    • Stock price and EPS have diverged as compared to its peers
    • Even as consumer segment of the business slides, Dell is making strides in enterprise solutions space

    Risks:

    • Market continues to punish Dell for poor performance in the consumer segment
    • Poor stock performance leads to a negative feedback loop
    • Acquisitions eat up profits, fail to deliver expected growth and/or synergies

    Stock Performance:

    Over the last few years, DELL has been performing poorly relative to its peer group. If there's any solace it's that HP has been worse off. Based on just stock performance, signs are not encouraging - yet with a long-term view our outlook is that DELL has tremendous upside even if it manages to hold on to its current revenue base.

    1-year performance

    TOSYY:Toshiba HPQ:Hewlett Packard LNVGY:Lenovo AAPL:Apple

    3-month performance

    Business outlook and Management:

    Dell is an enterprise play, just like Microsoft and more investors need to adjust their expectations that an increasing share of revenues and profitability will be driven by its performance in the enterprise segment.

    Relative measures

     

    DELL

    HP

    Toshiba

    Lenovo

    Apple

    EMC

    PE

    5.53

    NMF

    15.34

    17.71

    12.33

    20.02

    Price/Book

    1.63

    0.85

    1.43

    3.98

    4.43

    2.38

    ROE

    33.45%

    15.60%

    7.62%

    23.08%

    42.84%

    13.67%

    ROA

    5.61%

    4.72%

    2.24%

    3.03%

    23.61%

    7.15%

    EV/EBITDA

    2.56

    3.29

    5.93

    5.96

    8.47

    9.47

    Total Debt/Equity

    86.68

    93.04

    129.03

    1.67

    0

    7.48

    Cash/share

    6.86

    4.85

    3.07

    7.29

    30.52

    2.59

    These comparisons highlight the fact that Lenovo/Apple/EMC are expected to have higher growth while DELL,HP and Toshiba are cheaper because the market expects them to have low or no growth in the coming years.

    Price versus EPS overlay

    Dell

    Hewlett Packard

    EMC

    DCF Valuation:

    We've taken a rather pessimistic view of revenue growth over the next few years, assuming that DELL continues to lose revenues especially in the consumer segment.

    Operating margin assumptions are in line with recent historical averages

    A similar DCF analysis for HP and EMC reveals fair values that are much closer to the current market price.

    In summary: DELL looks undervalued at it current price levels and looks like a good candidate to initiate a buy.

    Additional reading:

    > New enterprise head Marius Haas talks about plans for the enterprise segment:

    http://allthingsd.com/20121019/seven-questions-for-dell-enterprise-head-marius-haas-and-software-head-john-swainson/

    > Dell investor relations blog: http://en.community.dell.com/dell-blogs/dell-shares/default.aspx

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DELL over the next 72 hours.

    Additional disclosure: Standard disclosure - This is not investment advice, please do your research or speak with a professional advisor before seeking to act on any information presented here

    Nov 09 9:03 AM | Link | Comment!
  • Dumpster Diving Series - BBY Starts To Look Promising

    Our Recommendation: Wait for clarity on Q4 performance (quarter results will be announce in Feb 2013) before initiating any change in stock position.

    Fair value estimate: $20 - $24.

    See valuation grid below for how the numbers stack up.

    Turnarounds are hard and the vast majority of companies fail. For BBY a lot of the bad news has been priced in. Failing any evidence of a sustained recovery in top line growth this stock should be avoided - however on the flip side if they do manage to beat low expectations there is tremendous upside.

    Management:

    The leadership team at BBY is in turmoil. The current CEO has been in office for a few months now, the search is on for a new CFO and there is a large degree of uncertainty regarding the strategy for the company going forward.

    Stock Performance:

    Total Returns over 2 years

    The chart above says it all. BBY investors have been taking a bath. In 2 years the total return on the stock is down 60% while competitors like Amazon and Walmart are up 40%. Just in the last month the stock has lost 10% to move below $16. This despite talks about a buyout offer valuing the stock at roughly $24 . Clearly the market has given up on this stock.

    Fundamentals:

    This is where it gets interesting. A dcf analysis with conservative estimates of negative/low growth for the next few years still prices the stock above its current price. See details below. Particularly with a worst case estimate of ~ 45B in revenues for the next 7-8 years.

    Relative Measure:

    Low growth stocks typically have lower multiples and BBY is no exception. Based on EV/EBITDA it's trading below radio shack.

    BBY - Price versus EPS Overlay

    In short, BBY holds a lot of promise, the market has basically written them off and they might well be -- however Thanksgiving/Christmas sales and the pending Buyout offer should support this stock and potentially drive it higher.

    Additional Reading:

    http://seekingalpha.com/article/949451-mapping-out-best-buy-s-q3-warning

    http://www.startribune.com/business/176694571.html?refer=y

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 08 9:17 PM | Link | 3 Comments
  • Dumpster Diving Series: Nokia Looks Enticing But Wait For Those Lumias To Sell First

    Our Recommendation: Wait for a couple of quarters to see if Nokia handset sales stabilize (they seem to be in free fall right now) and if customers are adopting the Windows mobile platform.

    Fair value Estimate: $3 - $5

    See valuation details below

    Stephen Elop has been in charge for over 2 years now and has seen the stock slide over 70% during his tenure. Ten's of thousands of jobs have been lost and more to come in the near future. But then the seeds for Nokia's current woes were sowed more than 5 years ago when it failed to recognize the huge tidal wave of smartphone adoption across the world. Samsung (KR:005930) is a good example of a company that hung in there with Apple and has really adopted a fast follower approach .

    5 Year Total Return

    005930 - Samsung Electronics; TW:2498 - HTC Corp. Not traded on US exchanges

    1 Year Total Return

    005930 - Samsung Electronics; TW:2498 - HTC Corp. Not traded on US exchanges

    Nokia's current strategy of betting its future on the Windows ecosystem is a risky one, though one could argue its choices were limited. The reality is that even if Windows mobile is a success there is going to be competition from other manufacturers. In fact a quick glance at the picture below shows that the Lumia 920 has strong competition starting right out of the gates.

    The hope must be that in partnership with Microsoft they would have a competitive edge in chipping away at the blackberry's stronghold in enterprise mobility.

    Valuation Details:

    2012, 2013 estimated revenues of roughly 37 billion USD with negative margins and then a slow recovery in 2014. This is a conservative forecast. For example, negative earnings will help reduce tax outlays for the years ahead and increase free cashflows.

    If you'd like a quick and easy way to do intrinsic valuations sign up here equisear.ch -- We're launching a series of tools for value investors to screen and value stocks.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: NOK, NOK, Turnaround
    Nov 08 9:14 PM | Link | 3 Comments
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