By: Brendan Gilmartin
Dell (NASDAQ:DELL) is scheduled to report 1Q 2013 earnings after the close of trading on Tuesday, May 22. The results are typically released immediately after the closing bell with a conference call slated to follow at 5:00 p.m. EST. Dell has made great strides in recent quarters, transforming itself by expanding into the enterprise market, delivering high-end server capability in the data center, along with cloud-computing and virtualization solutions. Results from Dell will also be watched as a precursor for numbers from rival Hewlett Packard (NYSE:HPQ) on Wednesday.
Outliers & Strategy
- Non-GAAP Earnings Per Share: Last quarter, Dell shares sold off sharply in response to a weaker than expected Non-GAAP EPS figure.
- Gross Margin: This is a critical measure for Dell. The "knee-jerk" reaction does not often take into account gross margins. As the results are digested, this measure typically gets close scrutiny.
Dell is expected to earn $0.46 per share (range is $0.38 to $0.52) on revenues of $14.89 bln, down 0.9% from the year-ago period. (Source: Yahoo! Finance). Dell already indicated it was seeing some uncertainty around hard disk supply and pricing, but should improve relative to the fourth quarter. Dell also anticipates good customer receptivity from its 12th generation server line.
Dell remains an attractive value play at 6.7x forward earnings and 0.42x sales, with a PEG ratio of just 1.04. The company is also sitting on $8.40 per share in cash which it is using to more aggressively repurchase stock. Finally, Dell is trading at just 4.9x cash flow, well below the 5-year average of 6.9x cash flow.
- 05/17: Sterne Agree upgraded Dell from Underperform to Neutral with a price target of $15, according to a post on StreetInsider.com. The firm noted that downside appears limited, despite concerns over Dell's fundamental position.
- 04/12: Morgan Stanley upgraded Dell from Underweight to Equal-Weight and raised the base valuation to $18, according to Benzinga.com. The firm noted recent acquisitions will help improve Dell's product mix.
- 04/11: Gartner Inc. reported PC shipments rose 1.9% in the 1Q 2012 period, exceeding its earlier forecast for a 1.2% decline. The report showed strength in the EMEA segment was offset by weakness in the Asia/Pacific region. The report showed Dell underperformed in most regions versus the prior year, while overall market share declined.
Dell shares are at the lowest level since the start of the year and off 19% from the 52-week high of $18.36 established on February 22. The Relative Strength Index (RSI) at 25.37 is well below the 30-threshold - signaling an oversold scenario, while the recent sell-off appears to have culminated with a bullish "hammer" candlestick pattern - signaling a potential reversal. Should results surprise to the upside, there is room to run toward the 200-Day SMA at $16.00. Support is at the recent lows in the $14.60/$14.70 area with downside risk to $14.00 and the 52-week low of $13.29 (8/18/2011). (Chart courtesy of StockCharts.com)
Dell shares have come under heavy selling pressure amid concerns over global PC demand resulting from a weakening macroeconomic backdrop, softness in Asia, and hard disk supplies. Nevertheless, with the shares trading at less than 7x forward earnings, a PEG ratio of just 1.04, anticipation ahead of a new updated server line, a more diversified product mix, and share repurchases, recent technical indicators suggest Dell shares could be poised for a recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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