I post alot of these and sometimes its just info and other times its stocks that I have been watching closely. This is one of the cases in which I have been watching Dell closely. Their competitive advatange is their supply chain management and this hasn't changed and is not seriously in jeopardy of being out done by any rivals. I liked Dell at $30 a share, but lacked the cash (outside of margin) to get in. Now it has crept down into the $26 a share range and this is to my delight. I'll let you guys know at what price I get in at, but here is the report for futher insight and comments are always appreciated.
DELL
by Mark E. Lanyon, CFA
Analyst Note 04-20-2006
A series of headlines have emerged over the last few weeks that paint a less than rosy picture for Dell's DELL fiscal 2007 first-quarter performance. As we tend not to revise our estimate of a company's long-term value based on unsubstantiated reports and less-than-perfect estimates of PC-market performance, we are not contemplating any adjustment to our fair value estimate. We do feel, however, that these headlines show that Dell's turnaround remains a work in progress, and immediate gratification may not be in the cards over the next three months. Dell shareholders should be prepared for more bumps before the market realizes this company's true value.
An Asian trade journal, Intel's earnings performance, and new numbers from third-party industry watchers are adding up to another potentially mediocre quarter for Dell. Digitimes, a Chinese technology journal that keeps a close watch on Pacific Rim component manufacturers, floated a rumor on April 11 that notebook vendors such as Dell and Hewlett-Packard HPQ were scrambling to negotiate component price discounts in a reaction to slowing notebook PC sales. While Digitimes' prediction track record is less than sterling, this report was followed by lukewarm commentary from Intel INTC in its conference call Wednesday regarding PC OEM demand for its processors. This morning, both the Gartner Group and IDC, two reputable tech industry research firms, posted their preliminary guesstimates for first-quarter calendar 2006 PC unit sales, and both firms reported a slide in Dell's overall global market share. IDC's "Worldwide Quarterly PC Tracker" gauged Dell's global market share at 18.1% in the first calendar quarter of 2006, down from 19% a year ago. This slide occurred in a surprisingly strong first quarter for the PC market; global PC shipments grew over 13% year over year, well ahead of expectations.
This slide in global market share is not necessarily a bad thing, as it could finally be a sign of Dell living up to its promise of a better mix of growth and profitability. Dell continues to show surprising strength in international markets, and its enterprise, flat panel, and printing offerings look to post another blowout quarter. A stabilization of margins in legacy desktop products coupled with the scaling of break-even or loss-leader ventures such as printing could lead to a potentially surprising level of operating profitability. With a host of catalysts ranging from the Windows Vista upgrade to Intel's revamped processor lineup set for the back half of the year and into 2007, we feel our thesis is intact and that Dell remains the most compelling investment opportunity in the technology hardware space.
Thesis 12-12-2005
Dell has used ultra-efficient manufacturing and a direct sales approach to dominate the PC market. While competition is heating up in its core desktop PC market, Dell is rapidly winning customers in several new technology markets. We believe its low-cost advantage will continue to deliver market share gains in both new and traditional markets while generating outsized returns on invested capital.
Dell's direct model, which eliminates middlemen and emphasizes cost-efficient production, provides a consistent pricing edge over rivals, which lack Dell's procurement and distribution prowess and are largely locked into expensive retail distribution channels. This supply-chain expertise has proved hard to replicate, and competitors are loath to stray from existing distribution methods, making for a sustainable competitive advantage.
Dell occupies the top spot in the global PC market (18.5% share), which is maturing and encountering new and formidable competitors. Longtime rivals such as IBM IBM have exited the industry, and low-cost Asian firms such as Acer and Lenovo (which purchased the IBM business) have ambitions to fill the gap. Despite these new challengers, we believe Dell's cost advantage will continue its streak of market share gains.
To compensate for the PC business, Dell has expanded the scope of its product line. It now occupies the number-two spot in the global volume server market and has joined forces with EMC EMC to offer data storage gear to small and midsized businesses. Taking aim at the fat margins enjoyed by HP HPQ, Dell has partnered with Lexmark LXK to offer a line of printers and consumables. Dell is expanding into IT services, utilizing subcontractors for integration and maintenance services. This boosts its ability to service larger enterprise customers. Dell's low-cost model has proved extremely effective in each of these new hardware ventures. Given its relatively small share in most of these product groups, we think Dell's expanded product breadth will enable it to comfortably grow sales at a low-teens pace going forward.
Our biggest worry is the competitive climate in the desktop PC market. Asian firms have often endured break-even margins to generate growth and could induce an irrational pricing environment in their quest for market share. The cyclical nature of IT spending is another worry. We believe Dell is still operating from a position of strength, however, and we are confident it will continue to grow in a profitable fashion by leveraging its wide-moat business model.
Valuation
We calculate a fair value estimate of $46 per share. We think Dell can grow its revenues at a low-teens pace over the next five years as growth in new hardware markets and IT services as well as international expansion make up for the slowing pace of desktop PC sales. We assume Dell will stick with its strategy of passing cost savings on to customers through price reductions, and bank on only slight operating margin expansion to a bit over 9% over the next five years. Dell's liberal use of stock option grants has a big impact on our calculations, removing 9% from our fair value estimate.
Risk
Increased competition is our biggest worry. Competition in low-end servers and storage is heating up as rivals vie for a piece of that opportunity, and the PC market may see irrational pricing from struggling competitors and ambitious Far Eastern firms looking to gain market share. Cyclicality in IT spending is a key risk.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Dell 55,908 61,066
* Hewlett-Packard 87,901 93,055
* Gateway 3,854 815
* IBM 91,134 128,692
* Sun Microsystems 11,664 17,236
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 10-31-2005
DELL
by Mark E. Lanyon, CFA
Analyst Note 04-20-2006
A series of headlines have emerged over the last few weeks that paint a less than rosy picture for Dell's DELL fiscal 2007 first-quarter performance. As we tend not to revise our estimate of a company's long-term value based on unsubstantiated reports and less-than-perfect estimates of PC-market performance, we are not contemplating any adjustment to our fair value estimate. We do feel, however, that these headlines show that Dell's turnaround remains a work in progress, and immediate gratification may not be in the cards over the next three months. Dell shareholders should be prepared for more bumps before the market realizes this company's true value.
An Asian trade journal, Intel's earnings performance, and new numbers from third-party industry watchers are adding up to another potentially mediocre quarter for Dell. Digitimes, a Chinese technology journal that keeps a close watch on Pacific Rim component manufacturers, floated a rumor on April 11 that notebook vendors such as Dell and Hewlett-Packard HPQ were scrambling to negotiate component price discounts in a reaction to slowing notebook PC sales. While Digitimes' prediction track record is less than sterling, this report was followed by lukewarm commentary from Intel INTC in its conference call Wednesday regarding PC OEM demand for its processors. This morning, both the Gartner Group and IDC, two reputable tech industry research firms, posted their preliminary guesstimates for first-quarter calendar 2006 PC unit sales, and both firms reported a slide in Dell's overall global market share. IDC's "Worldwide Quarterly PC Tracker" gauged Dell's global market share at 18.1% in the first calendar quarter of 2006, down from 19% a year ago. This slide occurred in a surprisingly strong first quarter for the PC market; global PC shipments grew over 13% year over year, well ahead of expectations.
This slide in global market share is not necessarily a bad thing, as it could finally be a sign of Dell living up to its promise of a better mix of growth and profitability. Dell continues to show surprising strength in international markets, and its enterprise, flat panel, and printing offerings look to post another blowout quarter. A stabilization of margins in legacy desktop products coupled with the scaling of break-even or loss-leader ventures such as printing could lead to a potentially surprising level of operating profitability. With a host of catalysts ranging from the Windows Vista upgrade to Intel's revamped processor lineup set for the back half of the year and into 2007, we feel our thesis is intact and that Dell remains the most compelling investment opportunity in the technology hardware space.
Thesis 12-12-2005
Dell has used ultra-efficient manufacturing and a direct sales approach to dominate the PC market. While competition is heating up in its core desktop PC market, Dell is rapidly winning customers in several new technology markets. We believe its low-cost advantage will continue to deliver market share gains in both new and traditional markets while generating outsized returns on invested capital.
Dell's direct model, which eliminates middlemen and emphasizes cost-efficient production, provides a consistent pricing edge over rivals, which lack Dell's procurement and distribution prowess and are largely locked into expensive retail distribution channels. This supply-chain expertise has proved hard to replicate, and competitors are loath to stray from existing distribution methods, making for a sustainable competitive advantage.
Dell occupies the top spot in the global PC market (18.5% share), which is maturing and encountering new and formidable competitors. Longtime rivals such as IBM IBM have exited the industry, and low-cost Asian firms such as Acer and Lenovo (which purchased the IBM business) have ambitions to fill the gap. Despite these new challengers, we believe Dell's cost advantage will continue its streak of market share gains.
To compensate for the PC business, Dell has expanded the scope of its product line. It now occupies the number-two spot in the global volume server market and has joined forces with EMC EMC to offer data storage gear to small and midsized businesses. Taking aim at the fat margins enjoyed by HP HPQ, Dell has partnered with Lexmark LXK to offer a line of printers and consumables. Dell is expanding into IT services, utilizing subcontractors for integration and maintenance services. This boosts its ability to service larger enterprise customers. Dell's low-cost model has proved extremely effective in each of these new hardware ventures. Given its relatively small share in most of these product groups, we think Dell's expanded product breadth will enable it to comfortably grow sales at a low-teens pace going forward.
Our biggest worry is the competitive climate in the desktop PC market. Asian firms have often endured break-even margins to generate growth and could induce an irrational pricing environment in their quest for market share. The cyclical nature of IT spending is another worry. We believe Dell is still operating from a position of strength, however, and we are confident it will continue to grow in a profitable fashion by leveraging its wide-moat business model.
Valuation
We calculate a fair value estimate of $46 per share. We think Dell can grow its revenues at a low-teens pace over the next five years as growth in new hardware markets and IT services as well as international expansion make up for the slowing pace of desktop PC sales. We assume Dell will stick with its strategy of passing cost savings on to customers through price reductions, and bank on only slight operating margin expansion to a bit over 9% over the next five years. Dell's liberal use of stock option grants has a big impact on our calculations, removing 9% from our fair value estimate.
Risk
Increased competition is our biggest worry. Competition in low-end servers and storage is heating up as rivals vie for a piece of that opportunity, and the PC market may see irrational pricing from struggling competitors and ambitious Far Eastern firms looking to gain market share. Cyclicality in IT spending is a key risk.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Dell 55,908 61,066
* Hewlett-Packard 87,901 93,055
* Gateway 3,854 815
* IBM 91,134 128,692
* Sun Microsystems 11,664 17,236
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 10-31-2005
