Still Bullish On Dell At Morningstar (DELL)

| About: Dell Inc. (DELL)
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Despite all the difficulties at Dell (more on that here), Morningstar maintains a five-star 'buy' rating on the stock. Here are excerpts from a December Morningstar report explaining their position:

Dell has used ultra-efficient manufacturing and a direct sales approach to dominate the PC market. While competition is heating up in its core desktop PC market, Dell is rapidly winning customers in several new technology markets. We believe its low-cost advantage will continue to deliver market share gains in both new and traditional markets while generating outsized returns on invested capital.

Dell's direct model, which eliminates middlemen and emphasizes cost-efficient production, provides a consistent pricing edge over rivals, which lack Dell's procurement and distribution prowess and are largely locked into expensive retail distribution channels. This supply-chain expertise has proved hard to replicate, and competitors are loath to stray from existing distribution methods, making for a sustainable competitive advantage.

Dell occupies the top spot in the global PC market (18.5% share), which is maturing and encountering new and formidable competitors... To compensate for the PC business, Dell has expanded the scope of its product line. It now occupies the number-two spot in the global volume server market...

Taking aim at the fat margins enjoyed by HP, Dell has partnered with Lexmark to offer a line of printers and consumables. Dell is expanding into IT services, utilizing subcontractors for integration and maintenance services. This boosts its ability to service larger enterprise customers. Dell's low-cost model has proved extremely effective in each of these new hardware ventures. Given its relatively small share in most of these product groups, we think Dell's expanded product breadth will enable it to comfortably grow sales at a low-teens pace going forward. Our biggest worry is the competitive climate in the desktop PC market....

Valuation: We calculate a fair value estimate of $46 per share. We think Dell can grow its revenues at a low-teens pace over the next five years as growth in new hardware markets and IT services as well as international expansion make up for the slowing pace of desktop PC sales. We assume Dell will stick with its strategy of passing cost savings on to customers through price reductions, and bank on only slight operating margin expansion to a bit over 9% over the next five years.

DELL 1-yr chart: