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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Dell (DELL) |
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Selected Analyst Coverage (Target): Credit Suisse — Outperform ($28) Bank of America — Neutral ($28) UBS — Buy ($26) |
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DELL Closed at $23.18 on 3-2-07 |
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Released 3-3-07 |
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Dell (ticker: DELL) is a computer manufacturer, marketer, and seller that utilizes a direct-to-consumer business model, among other practices, to position itself as the low-cost PC producer and provider. · Dell, long the market leader in sales of PCs, has recently relinquished its lead to Hewlett-Packard (ticker: HPQ). Dell’s declining market share (30% in US) is attributable to several causes, both external and internal. Externally, the PC market has seen continued erosion in the selling prices of computers driven by an increased commoditization of computers, lengthening replacement cycles because of the growth in quality of PC components, and a move from desktops to lower-margin laptops. Internally, Dell’s direct-to-consumer model is not translating to market dominance in the PC category, a lack of product differentiation has played into commoditization, and consumer perception has taken a hit from Dell’s public woes with customer service. · We believe part of Dell’s problems has been an overemphasis on revenue growth while ignoring profitability. While Dell made its reputation on the ability to produce for less and undercut higher-cost competitors, this legacy should not mean the company should waste resources to target low-to-no margin sales. The PC industry is not one where “loss leaders” is a feasible advertising strategy; and we believe Dell has sufficient control over its manufacturing process that zeroing in on generating profitable sales will not be excessively difficult. · Dell has recently undergone a large management shakeup, headlined by the departure of CEO Kevin Rollins and the re-assumption of the CEO position by company founder Michael Dell. While he may lack the charismatic and innovative image of Apple’s (AAPL) CEO Steve Jobs, Michael Dell was the one responsible for building his namesake company into the $50 billion powerhouse it is today. His return, and the assembly of at least a half-dozen other new executives in the last six months, should provide the fresh perspective necessary to make this turnaround a success. · The great disparities in international PC use may prove to be a great benefit to the company. Dell is currently heavily dependent on America and Japan for its market share, and both nations have been slow to increase technology expenditures, no doubt negatively impacting Dell’s revenues. Dell only has a single digit market share in the fast growing Latin American (>20% year-over-year) and Asia Pacific (>12% YoY) markets. While the lower selling prices in emerging markets generally means lower margins and profitability, Dell earned its position in America through extremely efficient and low-cost production methods. If Dell can replicate these practices and scale them to emerging markets, the company could healthily profit in the near future - but more importantly, Dell would begin building lasting customer relationships in a growth market. · Given Dell’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for DELL is $26, putting Dell shares as being undervalued by approximately 12% based of Friday’s closing price of $23.18.
Disclosure: The analyst uses a Dell laptop, but has no position in the stock or its derivatives. |
