Dell margins, consistency in focus
Dell Inc hopes healthy business spending and favorable component costs will help it build on recent progress to improve profitability -- and convince investors still not sold on its turnaround efforts.
February 12, 2011 / 11:40 IST
Dell Inc hopes healthy business spending and favorable component costs will help it build on recent progress to improve profitability -- and convince investors still not sold on its turnaround efforts.
Dell, the world's number two personal computer maker, is aiming to be a bigger player in data center equipment and the red-hot mobile market, but the bulk of its revenue still comes from low-margin PCs, a situation the company is trying hard to rectify. It faces formidable competition in International Business Machines Corp and Hewlett-Packard Co.Dell's turnaround effort has been a bumpy one, and analysts say it needs to show consistency to give investors a compelling reason to buy its stock. Dell reports February 15."Dell has a tremendous opportunity but we need a clearer path on how the company plans to transition," said Gleacher & Co analyst Brian Marshall, who has a "neutral" rating on the company.Marshall is looking for a "sustainable change in profitability," and for Dell to explain how it can boost its gross margin above 20%.Last quarter, Dell surprised Wall Street as earnings and margins blew past expectations, and the company raised its yearly forecast.Margins are the thingInvestors remain wary on Dell, worried that it is wedded to low-cost commodity PCs that are a drag on margins and offer little chance of significant growth.For its fiscal fourth quarter, Dell is expected to earn 37 cents a share on revenue of USD 15.7 billion, according to Thomson Reuters I/B/E/S. That would represent EPS growth of 32%, on 6% revenue growth.Dell's shares often trade off its gross margin performance, which has been extremely choppy. The company has missed Wall Street's margin target for six of the past eight quarters.Analysts, on average, are predicting a margin of 18.5% for quarter four.Dell's shares continue to underperform the broader market. The company's stock is flat from a year ago, versus a roughly 30% gain in the Nasdaq.Chief Executive Michael Dell has made it clear he is willing to spend from the company's USD 14 billion cash pile to buy the pieces it needs to diversify and boost margins, with a particular interest in software and storage.The company has also made plenty of noise in the mobile market of late, launching tablets and smartphones, but they have received a lukewarm reception.Dell trades at near 10 times forward earnings, a bit better than rival HP, but a lower valuation than IBM.According to an analysis by Thomson Reuters StarMine, Dell's shares are undervalued, carrying an intrinsic value of USD 18.80 a share, well above their current level of USD 13.98. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
