Market Overview

Dude! You Might or Might Not be Getting a Dell


Dell (NASDAQ: DELL) reported earnings last night that were mixed, and shares are trading lower this afternoon as a result. At last check, shares were off around 1.25%.

The company reported third quarter earnings of 54 cents per share on $15.37 billion in revenues. Wall Street was looking for earnings of 47 cents per share on $15.69 billion in revenues.

“Our results this quarter and over the past year reflect a new Dell, one focused on providing our customers productivity-enhancing solutions either developed organically or acquired,” said Michael Dell, chairman and CEO. “We're now investing in research and development activities at almost a billion-dollar annual run rate and our earnings per share is up 86 percent over the last 12 months.”

In the conference call yesterday, the Round Rock, TX-based company did say that it was able to offset the shortage in hard drives as memory and panel prices continue to fall. Despite that positive trend, it does not expect revenue growth to be gangbusters, and guided it towards the lower end of the 1 to 5 percent range.

Collins Stewart was mildly positive on the report. The research firm, and it seems like the majority of Wall Street is concerned with how the company is going to grow revenues, as well as the concerns on the hard disk drive problems going on in Thailand, due to weather.

Collins Stewart wrote, "What's holding back the shares, especially in the light of very good performance in a number of areas, is clarity on eventual top-line growth, op ex trajectory & sustainable OM levels/direction.”

Goldman Sachs was slightly more positive, raising its price target on the report to $12, but it still has a Sell rating because of the worries about revenue growth, and the problems in Thailand. The New York-based research firm did have a caveat, saying, that if it saw evidence that Dell was able to have minimal gross margin erosion, "many of [its] concerns with the story would be alleviated."

Michael Dell has continued the transition to move into more of a software company, generating higher margins, eschewing hardware. The transition has had some bumps in the road, as it tries to compete with IBM (NYSE: IBM), SAP (NYSE: SAP), and to a lesser extent, Hewlett-Packard (NYSE: HPQ).

It seems as if there will be more bumps in the road for a while, as Dell and the rest of his team get the company to where they want to be. But at just 8 times 2012 earnings, dude, you're getting a Dell very cheap.


Traders who believe that Dell is likely to be able to generate stronger earnings in 2012 might want to consider the following trades:

  • Dell is very cheap at less than 8 times expected 2012 earnings. Traders could initiate a position long in this name.

Traders who believe that Dell's problems with Hard Drives may consider alternate positions:

  • If input costs for Dell get out of whack and stay that way for a while, earnings power could hurt severely. Traders may want to short.

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