Why the stock is going down?<o:p></o:p>
Dell Corp. is one of the first companies providing computers, enterprise systems, software and peripherals. Even if Dell is considered as a pioneer in logistics of merchandising, it has several missteps in meeting customer standards, competitors have been re-invigorated, and most recently laptops have caught fire due to faulty batteries. Dell’s laptop recall is estimated to cost $400M to the company according to the streets. The cost of production, shipping and marketing to revive the demand of their products will be shared with Sony. Those efforts are used to re-invigorate their image, but at the end, it doesn’t help their profile on a short-term basis. The company also revealed it is being investigated by the U.S. Securities and Exchange Commission (SEC) for issues of revenue recognition and financial reporting in certain periods prior to fiscal year 2006. Consequently, we should be aware about the resolution of the SEC informal investigation. This would also explain the huge decrease in Dell’s stock price recently. <o:p></o:p>
<o:p> </o:p>Solid Business Model<o:p></o:p>
Despite these setbacks, Dell has been expanding its product lines and markets. Dell has approximately $12B in cash and high returns on capital (67.31%). Dell sells its products directly through sales representatives, telephone-based sales and online orders. A new campaign of marketing is running across the <st1:country -region w:st='on'><st1:place w:st='on'>United States</st1:place></st1:country> by providing customer service stands and sales counters in shopping mall. Dell’s strength lies in its low cost leadership position and its outstanding business model, and also focuses on its ability to develop innovative products and form strategic alliances. Dell has entered into a joint venture with EMC Corp to offer data storage gear, and with Lexmark to offer a line of printers and supplies (consumables) to compete with HP.<o:p></o:p>
Dell, despite intense competition from Hewlett-Packard and Toshiba, holds the top spot in the global PC market with an 18% share. Dell has also expanded its position as the second largest global supplier of volume servers.<o:p></o:p>
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Catalyst for Growth<o:p></o:p>
Even if the North American market is maturing, Dell’s international addressable markets are growing and now accounts for 41% of Dell’s total sales. The company earns approximately 80% of its revenue from its corporate customers and is leveraged to desktops. Dell may see an increase in sales from the release of the Windows Vista operating system if corporate spending accelerates. Additionally, Dell is developing a presence in high-growth markets like <st1:country -region w:st='on'><st1:place w:st='on'>India</st1:place></st1:country> and that is expected to expand. A huge promotion for the upcoming holidays should be also a catalyst; Dell is offering laptop for $500 and a new range of laptops that worth a look. Therefore, management expects to be able to increase their sales in the high-single digit. The company also been chosen by Army's Desktop Mobile Computing to provide desktops, notebooks and others peripherals for a long-term contract (10 years) with a purchasing ceiling of $5B.<o:p> </o:p>
Why we should own the stock?<o:p></o:p>
However, there are concerns over Dell’s cash levels. Dell’s stock option program consumes a large portion of cash in share repurchases. A better allocation of capital would be more beneficial to investors. Net profit margins are expected to rise from 5% to 8%, and Dell is also trading at an attractive 5.7% earnings yield. <o:p></o:p>
On a valuation basis, Dell’s stock is selling near its 52-week low. Based on full year sales estimates, Dell is selling at 0.96 times on a P/S basis. Dell’s balance is strong with a debt/equity ratio around 16% and return on equity of over 60%. Dell also has cash over $12 billion. Dell is well-managed and is working its way through some tough issues. As the company comes out of the other side of the rough patch, it will be positioned for renewed growth with a proven business model and new joint ventures that will help improve sales and earnings. As a contrarian point of view, Dell is trading at levels that seem obvious as a bargain.<o:p></o:p>
$26.13 (12/13/06)
