Dude, You Should Buy Dell! (DELL)

By Edward Stavetski | October 26, 2006 AAA

Dell Corp (DELL) has been one of the premier companies providing computers, enterprise systems, software and peripherals. Dell has hit several missteps as its service is not meeting customer standards, competitors have been re-invigorated, and most recently laptops have caught fire due to faulty batteries.

Despite these setbacks, Dell has been expanding its product lines and markets. Dell has approximately $12 billion in cash and enviable returns on capital. Dude, you should get a Dell!

Dell sells its products directly through sales representatives, telephone-based sales and online orders. 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, despite intense competition from Hewlett-Packard (HPQ), Toshiba and Lenova, 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.

Dell has also entered into a joint venture with EMC Corp (EMC) to offer data storage gear, and with Lexmark (LXK) to offer a line of printers and supplies (consumables) to compete with HP.

This product expansion is lifting hopes that Dell will be able to expand sales at a high single digit clip.

The North American market is maturing, but Dell's international business is growing and now accounts for 41% of total sales. The company earns approximately 80% of its revenue from its corporate customers and is leveraged to desktops.

Dell may see an uptick in sales possibly from the release of the Windows Vista operating system if corporate spending accelerates. Additionally, Dell is developing a presence in high-growth markets like India and that is expected to expand.

On a valuation basis, Dell's stock is selling near its 52 week low. Based on full year sales estimates, Dell is selling at 0.9 times on a Price/Sales basis. Dell's balance is strong with a debt/equity ratio of about 16% and return on equity of over 60%. Dell also has cash on hand of over $12 billion.

There are, however, 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 8-9%, and Dell is also trading at an attractive 5.7% earnings yield.

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, Dell is trading at levels that will seem obvious as a bargain in hindsight.

It will make investors say "Dude you should have bought Dell"!

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