Dell Is Attractive And A Way To Play Windows 8

| About: Dell Inc. (DELL)
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Last week, Dell Inc. (DELL) delivered 2Q results and, once again, the market wasn't too happy about them. Since then, the share price has been trading near its 52-week low, valuing the company at around $19.7B.

Chart forDell Inc.

The main reason for such a reaction was the lowered outlook for the rest of the year, with the company now expecting an EPS of at least $1.7. Let's assume that number and try to see if the current market prices may present an opportunity or are still unattractive.

2Q 2012 1Q 2013 2Q 2013
Revenues (millions) $15,658 $14,422 $14,483
Gross Margin % of rev. 22.5% 21.3% 21.6%
Net income (millions) $890 $635 $732

Despite possibly being stabilizing, and slightly better Q/Q, revenue came in at more than $1B below the same period last year, with gross margin also almost 1 percentage point below. The reason for such a decline is in the Mobility and Desktop PCs lines of business, whose revenues declined by $1,2B when compared with 2Q last year. Regarding the other lines of business, all of them have been performing well, with the best performance coming from Servers and Networking - which have grown 14% Y/Y.

This kind of challenge should have been expected because those lines of business continue to be more exposed to the economic difficulties that individuals and small businesses continue to face. Also, the market is changing and possible costumers are on the lookout for Windows 8 and the new line of products in the shape of tablets/hybrids/ultrabooks that will take advantage of that operating system and should be coming soon to the market.

So, if we set aside these circumstances and analyze what the company has been delivering, the results have been below expectations because of market changes that take time to adapt, rather than management errors. On the other hand, if they fail to succeed with the new products, either by unattractive products or by being late to the market, then there would be no excuse.

2Q 2013 1Q 2013
Cash and short-term investments (millions) $11,891 $13,715
Long-term debt (millions) $5,832 $5,813
Total equity (millions) $9,746 $9,357
Shares outstanding (millions) 1,749 1,761

Forgetting product changes, at current prices the company seems fairly valued. With a market cap of $19.7B you get almost $12B of cash and short-term investments, long-term debt of $5.8B, total equity of $9.7B, and a yearly net income of almost $3B (1,7*1749), meaning that in less than seven years you get your investment back (19.7/3=6.56). Also, while you wait, you will be benefiting from both the dividend payment and the stock buyback program.

So, while Dell's valuation alone could justify investing at current prices, there could also be an interesting play here. If you believe that Windows 8 will be successful, and given that Microsoft's (NASDAQ:MSFT) share price already reflects that, investing in Dell can be a way to benefit from that success, as hardware makers will also benefit from it.

Dell is currently attractive and the new Windows 8 products can be the catalyst for the company. This can be a good opportunity to take advantage of both.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.