Dell Not Ready to Call the Bottom in PC Sales

In contrast the tone of some optimistic technology companies, Dell (DELL) reported on Thursday evening that the bottom in sales of computers could still be ahead. Recently, Intel’s (INTC) CEO said he was confident that the worst was behind them (Chip Makers in Focus), and he may be right but Dell is not ready to make that sort of claim. Signals are mixed as to what the demand outlook will be for the rest of the year, but the company did allude to what they believe will be a powerful replacement cycle. There was no time frame attached to this statement, but it does make since that after a period of slower sales that there will be good sales growth when the business cycle turns.

The quarterly performance was again pretty weak for Dell, although better than analysts had anticipated. The company earned 23 cents per share in the quarter a penny better than expected, even though it represents a 63% drop from a year ago. Revenue did not reach the analysts estimates, which shows that Dell has been quite effective in cutting costs through the downturn to be able to keep earnings up. Interestingly, according to Yahoo! finance (YHOO) analysts have been lowering EPS estimates for Dell in the last thirty days by a ratio of 4 to 1. With the general improvement in the stock market over the last two and a half months, that is a bit of a surprise. Dell’s stock is up about 3% in Friday morning trading as the company beat the lowered earnings estimates and refrained from given formal guidance.

Dell continues to be Undervalued by our methodology, as it has been for quite some time now. A quick glance at some of Dell’s valuation metrics gives a good indication of why, for example, price-to-cash has historically ranged between 14.9x and 25.7 over the last ten years and the current metric is well below this level at just under 7. Similarly, price-to-sales currently sits at just about one-third of the low end of the historically normal range. Even with profit margins that are traditionally very low, Dell management still has a track record of producing ROE that is quite impressive. The company has an immense cash hoard and in comparison very little in the way of debt. We are continuing to reaffirm our positive outlook on a long term valuation of Dell.

“Dell reporting sharply low earnings on falling pc sales saying it is not ready to call bottom just yet. Sales of laptops falling 20% due to weaker demand sending profit down 63%. On the bottom line Dell earns 24 cents per share that is a penny better than the estimate. This morning Barclays raising Dell’s price target to 10 bucks a share that’s up a buck but less than where the stock is trade right now. Deutsche Bank raising its target on Dell to $15 per share.” Fox Business Money For Breakfast 5/29/2009

Dell Not Ready to Call the Bottom

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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