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Dell Deserves A Closer Look

|Includes:Dell Inc. (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

Stocks: DELL