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Dell's Dull Quarter
Computer giant Dell (Nasdaq:DELL) continues to work on trimming the unprofitable parts of its business and the third quarter results show why. For the quarter, Dell earned $893 million or 49 cents a share, compared with $822 million or 42 cents a share in the year ago quarter. However, absent one-time items listed by the company, Dell actually earned 54 cents a share. Analysts were expecting EPS of 47 cents. (For more on earnings, read The 5 Types Of Earnings Per Share.)
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Sales, Sales, Sales
While Dell's earnings number was solid, the revenue figures were not that inspiring. Third quarter revenue of $15.4 billion was flat quarter over quarter, but below average estimates of $16.2 billion. One can only grow earnings so much with an increase in sales. Clearly Dell's net income production during the quarter illustrates the company's success in reducing costs and eliminating less profitable business.
For what its worth, one quarter of poor sales performance is hardly a fair yardstick to evaluate the company. In fact, if sales are unprofitable, then is it indeed better to forgo those sales, as they will not increase intrinsic value over the long run.
What has investors disappointed in the quarter, is that Dell's revenue number came in below the company's own previous guidance. More so, Dell also predicted that 2011 full year revenues would now be at the low end of what the company had previously forecast; those forecasts have been reduced throughout the year, as well. Effectively, business is not as healthy as management thought it would be in 2011.
Value or Value Trap
Amidst its peers of large cap tech companies, Dell's valuation is one of the most compelling. However, that may be due to the lack of growth Dell's business is experiencing. At about $15.13 a share, Dell is trading at eight times 2011 earnings. In addition, the company sits on over $8 per share in cash. Since the company generates all the capital it needs, and then some, Dell shares trade for less than eight times earnings. Only Hewlett Packard (NYSE:HPQ) commands a valuation that cheap and that company is in the midst of a significant turnaround.
The "cheapness" of DELL and HPQ is a result of uncertainty. Stable tech giants like Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC) trade for nearly 10 times earnings, but both also pay a generous yield of at or above 3%, something Dell doesn't do. However, Dell is buying back boatloads of its stocks at prices that could be very value creating for shareholders, later in the future.
The Bottom Line
Technology is a rapidly changing industry, a phenomenon that even Dell isn't' immune to. The disappointing sales figures are a reflection of this changing landscape. Time will tell if Dell has what it takes to exploit the new tech frontier. In the meantime, the company is smartly avoiding acquisitions and using its cash to buy its own shares at historically low prices. (To help you understand earnings releases, check out How To Decode A Company's Earnings Reports.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Sales, Sales, Sales
While Dell's earnings number was solid, the revenue figures were not that inspiring. Third quarter revenue of $15.4 billion was flat quarter over quarter, but below average estimates of $16.2 billion. One can only grow earnings so much with an increase in sales. Clearly Dell's net income production during the quarter illustrates the company's success in reducing costs and eliminating less profitable business.
For what its worth, one quarter of poor sales performance is hardly a fair yardstick to evaluate the company. In fact, if sales are unprofitable, then is it indeed better to forgo those sales, as they will not increase intrinsic value over the long run.
What has investors disappointed in the quarter, is that Dell's revenue number came in below the company's own previous guidance. More so, Dell also predicted that 2011 full year revenues would now be at the low end of what the company had previously forecast; those forecasts have been reduced throughout the year, as well. Effectively, business is not as healthy as management thought it would be in 2011.
Amidst its peers of large cap tech companies, Dell's valuation is one of the most compelling. However, that may be due to the lack of growth Dell's business is experiencing. At about $15.13 a share, Dell is trading at eight times 2011 earnings. In addition, the company sits on over $8 per share in cash. Since the company generates all the capital it needs, and then some, Dell shares trade for less than eight times earnings. Only Hewlett Packard (NYSE:HPQ) commands a valuation that cheap and that company is in the midst of a significant turnaround.
The "cheapness" of DELL and HPQ is a result of uncertainty. Stable tech giants like Microsoft (Nasdaq:MSFT) and Intel (Nasdaq:INTC) trade for nearly 10 times earnings, but both also pay a generous yield of at or above 3%, something Dell doesn't do. However, Dell is buying back boatloads of its stocks at prices that could be very value creating for shareholders, later in the future.
The Bottom Line
Technology is a rapidly changing industry, a phenomenon that even Dell isn't' immune to. The disappointing sales figures are a reflection of this changing landscape. Time will tell if Dell has what it takes to exploit the new tech frontier. In the meantime, the company is smartly avoiding acquisitions and using its cash to buy its own shares at historically low prices. (To help you understand earnings releases, check out How To Decode A Company's Earnings Reports.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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