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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 0 comments
    Nov 9, 2012 9:03 AM | about stocks: DELL

    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

    Themes: Value, Long-term, Tech Stocks: DELL
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