Turning The Rumor Mill (DELL, TRMP, NFLX, MRK)

By Glenn Curtis | June 12, 2007 AAA

Every day, a virtual mountain of news emanates from the major wire services. And every day, Wall Street analysts and traders are inundated with a plethora of rumors - some true and some untrue.

To that end, let's go through some of this week's more popular news stories and rumors in a little more detail.

Dell Computer (NYSE: DELL)
Last week, the computer maker announced plans to start selling its PCs in 3,000 Wal-Mart (NYSE: WMT) stores nationwide. This week, it announced plans to sell its wares (more specifically its notebook PCs) at 580 Sam's Club stores, beginning next week.

So, what's the quick and dirty on Dell? While I suspect these deals don't sport high margins (because Wal-Mart and its Sam's Club outlets are notorious for putting the pinch on vendors), this is really good news for Dell.

I doubted the company could or would go the retail route; however, the fact that it has struck deals with two large, volume-oriented retailers may allow it to gain some serious ground on other box makers going forward, including Hewlett Packard (NYSE: HPQ).

Although I applaud the company's efforts to expand its distribution, Hewlett Packard has been eating the company's lunch.

In fact, as I pointed out in a previous article, HP seems to be growing its lead over Dell in the lucrative server business. Plus, ongoing cost cutting initiatives should make HP a big force to reckon with over the next year. (To read the full article, see Hewlett Packard Still On A Roll.)

Make no mistake, the Dell/Sam's Club relationship is good news. However, I'd prefer to see more on the new-product front and/or the establishment of several other relationships with high-profile retailers before jumping in.

Trump (Nasdaq: TRMP)
New Jersey newspapers are reporting that Dune Capital Management - a firm that is run by ex-Goldman Sachs (NYSE: GS) employees - is bidding for Trump's casinos in Atlantic City. Rumor has it that other suitors might emerge as well, given "The Donald's" apparent willingness to sell the casino empire he built from the ground up.

However, a recent research note put out by Bear Stearns (NYSE: BSC) analyst Carlo Santarelli nixes the notion that a buyout is in the cards. Santarelli suggests that the amount of capital that any buyer would have to infuse into the company to make such a transaction profitable, as well as looming competition from neighboring states, could put the kibosh on any such deal. But frankly, I disagree.

Despite the growing competition from Las Vegas, the Gulf Coast, and the developing market of Pennsylvania, the company's properties within Atlantic City remain among the most enviable because of their location and proximity to major thoroughfares. Additionally, I suggest the company could be run much more effectively and cost efficiently by a private firm. Remember, it costs a great deal of money to make all of those SEC filings and to maintain an investor relations function.

I think that a deal will be hammered out, and that the company will be taken out at or near the $20 level. That said, I stand by my previous comments that I'd prefer to see the stock pull back to the $12 or $13 level before jumping in, as insurance in case a deal does not materialize. (To read Glenn Curtis' previous take, see An Equity Roundup.)

Netflix (Nasdaq: NFLX)
There is a rumor circulating that Amazon (Nasdaq: AMZN) might make a bid for Netflix. Proponents of such a combination argue that a deal makes sense because Amazon could then market its services to Netflix's broad base of customers, and because the two companies could theoretically realize a host of money-saving synergies.

However, I don't think that such a combination will happen for a few reasons. First off, I don't think Amazon wants to get bogged down in a battle with Blockbuster (NYSE: BBI) for market share when it has more important fish to fry. Also, I don't think that the company wants to go head-to-head with a deep-pocketed player such as Apple (Nasdaq: AAPL) and its recent foray into downloadable content.

I like Netflix. However, as I've mentioned in previous articles, I wouldn't buy the stock solely on the speculation that it might get taken out.

Merck (NYSE: MRK)
There's a rumor circulating that Merck will announce another round of layoffs, and that the number of people being fired could be large. True or not, I think that this is a great time to buy the stock. The company has held up pretty well despite the ongoing Vioxx litigation.

It also has a vast cash horde of about $4 billion that it could theoretically use to repurchase stock, or to make accretive acquisitions. In addition, with all of the layoffs and cost-cutting measures that have been instituted over the last couple of years, the company seems to have a lot more leverage over its operating line.

If layoffs are announced I think that the stock could pop a couple of dollars. To be clear, this could be a good entry point for those with a longer-term investment horizon, thanks to what I perceive as the company's improving longer-term fundamentals. However, I would not suggest getting in on the stock solely with the expectation of a quick share-price pop if layoffs are announced.

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