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Thursday, August 17, 2006

Dell Earnings Preview (Aug. 17, 2006)

Dell is expected to report earnings after the close with EPS at $0.22 and revenues of about $14 Billion, compared to recent guidance of $0.21 to $0.23 and $14 Billion (compared to Prior estimates of $0.31+ and $14.25 Billion). The next quarter estimates are approximately $0.25 EPS on revenues of $14.58 Billion. We have had numerous warnings out of Dell in recent months, making a deteriorated situation worse.

How have we described Dell's situation over and over again? Oh yeah, Hell. If you want to compare the comparable quarter year over year, this quarter would compare to $13.42 Billion last year, and the coming quarter would compare to $13.91 Billion last year. So they are still showing growth, and the law of large numbers means it will take quite a long time for it grow significantly more.

The current "hell" situation is because they have either reached or are very close to reaching their critical mass in PC's. If you ever read "The World is Flat" you would be highly impressed with Dell's business model and supply chain. Unfortunately for Dell, that is not patentable and the other computer and peripheral makers started going to the same model and used their own efforts to tweak the model. Dell's model is also discussed in the public as being based on strong arming price cuts out of component suppliers that are deemed more excessive than others because of volume, and that can only go for so long before prices are zero. You don't even want to discuss the customer service complaints you read and hear about on blogs and in the media. This latest laptop recall is also at a horrible time for the back to school decision making crowd, although Sony may have more of the blame here. The current environment is also still suffering from the numerous delays of Microsoft's Windows Vista, although that should be universal by now.

No matter how you cut it, H-P and the ex-IBM Lenovo PC makers have just been biting further into the company's competitive advantage in what is becoming a very price conscious world. To make matters worse, just this morning there are headlines that David Miller, president of Dell China operations, has defected to go join Lenovo. H-P's earnings last night proved that the company is once again a formidable competitor.

Many other of Dell's sales initiatives in peripherals didn't catch on with consumers. In theory a PDA is a PDA, but Dell reportedly stopped funding developments on their Axim handhelds. In theory an MP3 player is an MP3 player, but their MP3 players now featured are mainly featured as Sandisk and Creative resale agreements and the Dell Ditty is apparently pidly.

Dell is also expected to formally announce it is going to offer even more AMD processor offerings that will ultimately kill the one-processor relationship the company has shared with Intel for years and years. There are already numerous reports out on this, and by now it is essentially a foregone conclusion.

Options traders are braced for a move of over 3% in either direction, but options expire tomorrow. If we used the September options, then we would say they are braced for a move of nearly 6%. So what happens here when all that you hear is Negative? You have to put on your contrarian hat and try to figure out what happens if the company shows a scenario that isn't quite as miserable as the street has been treating it. Dell has been essentially cut in half before the most recent recovery. It traded as low as $18.95 in recent weeks, and has climbed back up over $22.00. Part of that was a technology post-Cisco rally, and part of that was strength going into H-P earnings; but it is down 1.3% today at $22.42 after the H-P report. Dell now trades with a P/E of 15.88 and has a market cap of $51 Billion.

If Dell can manage to show that they are still growing and that they have not been turned into a pure commodity business, then the street is probably going to take a shot as far as value investors go, but they are at a crossroads and need to show they are still growing. If they are not able to show that the aggressive pricing environment has commoditized the company, then there may be just more of the same doldrums.

There has been some light talk that Michael Dell may be looking to retake a more aggressive role in the company after handing over many of the day to day operations to Kevin Rollins. That has been very light talk, and some of the issues affecting the company may be more of a sign of the times rather then Rollins being asleep at the wheel. We'll see right after the close.

Jon C. Ogg
August 17, 2006
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