Time To Own Dell And Express

Includes: DELL, EXPR, QSFT
by: Stock Gamer

In this article, I will run you through my comparable analysis for two undervalued stocks with very solid fundamentals. The following information serves as an introduction, and your further research is still warranted.

Dell Inc. (DELL)

Shares of DELL have declined 26.33% over the past 12 months on concern of continued weakness in the PC market. At $12.37 per share, the stock is dirt cheap trading at 3.3x the NTM EBITDA, 6.3x the NTM EPS, and only 0.7x the PEG. It appears the recent plunge is likely overblown as my model shows the stock is significantly undervalued.

Based on the comparable analysis including major global PC manufacturers and corporate technology solution providers, DELL indeed has a lackluster growth potential. But the firm is highly profitable and able to maintain a healthy FCF margin and a liquid balance sheet. In addition, I believe DELL's acquisition of Quest Software (NASDAQ:QSFT) reflects that the firm has fully realized the problems with its current business mix, and I expect the firm is able to continue shifting to the service business given its solid liquidity position. As such, it would be reasonable to assume the stock trades at a slight valuation discount to its peers. However, the relative valuation model shown below requires a whopping 42.2% discount on both the peer average P/E and EV/EBITDA multiples to justify the current market price of $12.53, suggesting the market is likely over-discounting the DELL's prospects.

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Express Inc. (NYSE:EXPR)

EXPR shares have plummeted 27.70% over the past 3 months primarily owing to miss on earnings and downbeat guidance in Q1 2012. At $18.17 per share, EXPR trades at 4.4x the NTM EBITDA and 9.6x the NTM EPS. Consensus estimates predict revenues, EBITDA, and EPS to rise by a 2-year CAGR of 6.8%, 7.5%, and 14.4%, respectively. Accounting for the growth potential, the stock is trading at just 0.6x PEG.

Despite the slower growth prospects, EXPR is also highly profitable compared with its peer average (see below). The firm also has an above-average FCF margin and a fairly healthy balance sheet. As such, it is reasonable to expect EXPR to trade at only a small valuation discount relative to its peers, but the current stock price of $18.17 suggests a sizable 29.3% discount on both the peer average P/E and EV/EBITDA multiples, implying market's overreaction on the negativity.

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Bottom line, the two stocks' depressed valuations provide investors a solid margin of safety. In the light of strong fundamentals, I recommend acquiring these two stocks at the current price or using an out-of-money put option to initiate a position.

Comparable analysis tables are created by author and financial data is sourced from Morningstar and Capital IQ.

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