Dell's Turnaround Talk Premature

By Wayne Pinsent | June 02, 2008 AAA

Computer manufacturer Dell (Nasdaq:DELL) reported strong first quarter numbers that showed the company's turnaround efforts are showing some results. CEO Michael Dell rejoined the company a year and a half ago to breathe some life into the company he founded, and after continued dismal results something seems to be working again.

Positive Report
On May 29, 2008 Dell reported net income of $784 million (38 cents per share), up 3.7% from $756 million (34 cents per share) in the same period last year. The results came in ahead of consensus analyst expectations which were looking for earnings per share to stay flat at 34 cents. Net sales rose 9% to $16.08 billion from $14.72 billion a year before. Revenue came in ahead of expectations that were set for $15.68 billion (To learn more on revenue expectations, see Revenue Projections Show Profit Potential and Great Expectations: Forecasting Sales Growth.)

The expectations were low for Dell, as the company has been consistently reporting poor results recently. I've been down on the stock in recent quarters. I was skeptical about the company's turnaround efforts, but these results are showing that something is starting to work.

Turning A Corner?
Shares of Dell rose nearly 10% on the news, and my outlook for the company is not as sour as it was. But before jumping into the stock again, remember that these results are good, but by no means are they great. Expectations have dropped for this company, and it becomes a lot easier for a company to beat estimates once they come down.

Operating profits actually decreased, and the 4% bottom line boost was not necessarily through purely positive factors. The company has dramatically reduced costs by reducing its workforce. Much of the cost reduction came from the company cutting 3,700 jobs during the quarter. Dell also benefited from growth in Asia, which helped boost sales. That sounds good. The problem is that a lot of its overall revenue growth was attributed to the company benefiting from a weak dollar. My biggest fear with the company's strategy has been the move toward commoditizing its product. This means organic sales growth is not adding to the bottom line like it used to.

The company received a nice boost in the stock price after a sharp decline since the beginning November 2007, where the company lost more than a third of its value. The results were decent, but the company has to do a lot more to win me over. I am not eating my hat yet. The turnaround is not clear, and I think there are stronger names in tech like IBM (NYSE:IBM), Apple (Nasdaq:AAPL), and Dell's chief competitor Hewlett Packard (NYSE:HPQ). I would rather own those stocks, at least until a clearer picture develops at Dell.

The Bottom Line
After a long time of disappointment from the company, Dell managed a positive surprise. The results show some progress and might be a sign the Michael Dell's turnaround plan is catching some wind. Still, the results came in ahead of low expectations and the results were boosted by large job cuts and foreign exchange help. Until more is known, a turnaround at the company is not clear. Especially with the recent bump in the stock price, I would rather own other tech names right now.

For related reading, check out Turnaround Stocks: U-Turn To High Returns.

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