Dell Quarter Not Bad At All

By Sham Gad | February 23, 2012 AAA

Dell (Nasdaq:DELL) reported 2012 fiscal fourth quarter and full year results highlighting the company's growth as a services and solutions provider. For the quarter, revenues were $16 billion, up 2% over the previous year. For the full year, revenue was $62 billion, an increase of 1% over 2011. Fourth quarter earnings per share (EPS) was 43 cents, a decline of 10% year over year. For the year, EPS was $1.88, up 39% from fiscal 2011. Yet, because Dell's numbers missed expectations, shares fell by nearly 5% on the news. Yet investors have a lot to like about Dell going forward. (For related reading, see How To Evaluate The Quality Of EPS.)

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No Longer a PC Company
During the year, Dell's enterprise solutions revenue was a record $18.6 billion. Dell, while still a leading seller of PCs, no longer wants to be just a computer company. The growth of cloud computing along with more computing power from Apple's (Nasdaq:AAPL) iPad and iPhone will continue to affect the demand for personal computers. For Dell, relying on the business segment for computer sales cannot be the sole growth engine growing forward. Dell wants to offer more to its customers including offering IT services across the entire spectrum from the data center to the actual device. Indeed, this strategy has worked very well for IBM (NYSE:IBM) which completely sold its computer business and focused squarely on the higher demand information technology segment.

The Bottom Line
Dell continues to focus on generating operating cash flow, a goal that many of its investors like to hear. In fiscal 2012, Dell pulled in $5.5 billion in operating cash flow of which $1.8 billion came in the fourth quarter alone. That cash flow allowed the company to repurchase 178 million shares, or around 10% of the company. Those share buybacks are likely to have a significant wealth creation effect for Dell shareholders. Dell currently has a market cap of around $30 billion with over $18 billion in cash and investments. With some $6 billion in debt, that puts Dell's enterprise value at around $20 billion. In other words, Dell is currently trading at 4 times operating fiscal 2012 cash flow. It's hard to find a better use for that cash than to buyback such an undervalued stock. Even Microsoft (Nasdaq:MSFT), which is considered a cheap stock by many, trades around 8 times cash flow. If Dell continues executing on its growth plan, it will easily deserve a similar multiple and the stock will double. Despite that, an emotional Mr. Market, shares just got cheaper for a quarter that offered a lot to be encouraged about.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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