Dell: The Best Horse

I’ve been meaning to get to Dell’s earnings report, which came out on Thursday. First, I have to say that Dell is one of my favorite stocks. The company is highly efficient. They know their market, and they rarely make mistakes. I should correct that. The company does make mistakes, but they handle their mistakes very well. In fact, I think that’s of the most important traits which separates a good company from a bad one.

Dell earned 38 cents for the quarter, which was up 23% from last year. Sales were up 15%, so their profit margins expanded. Dell has now earned 75 cents a share for the first half. Many people don’t realize this, but desktop PCs are just 37% of Dell’s business. The company is involved in several other markets. That’s part of the reason why it’s now “Dell Inc.” and no long “Dell Computer Inc.”

The stock took a big hit because it missed analyst sales projections. The Street was looking for a 17% rise in sales. The Street seems particularly troubled because Dell rarely misses a forecast. On Friday, Dell lost 7.4%, or roughly $8 billion in market value. The company blames itself. It said it was simply too aggressive with cost-cutting. Dell is selling PCs for as low as $299. The company also said that orders from the federal government have been weaker-than-expected.

Is this just spin? Or is it really a small glitch that Dell can easily handle.? The truth is that I simply don’t know. The difference with Dell is that I do know that its management has often had these kinds of challenges, and has met them head on. Kevin Rollins, the CFO, said that Dell could have made up for much of the shortfall if it had added $10-$15 to the price of each machine sold during the quarter. Well, that makes sense to me. He also made it clear that it was Dell’s fault but the problem is “one we feel we can fix fairly crisply. We think we can do it, we’ve been doing it now for 10 years.” That doesn’t sound like a company in trouble.

Why do I give Dell the benefit of the doubt? Let’s look at the big picture. Dell is still gaining market share. This quarter was the 18th straight quarter that Dell met or beat analyst estimates.

As can be expected, Goldman, Deutsche Bank and several other firms downgraded the stock. But I was pleased to see Lehman Brothers hold firm. The analyst there, Harry Blount, has been a consistent bull on Dell, and he’s been right. On CNBC, he called Dell, “the best horse in the sector.” Except for Apple, the rest of the competition is rough shape. IBM has left the business. Gateway is in trouble, and I don’t even want to go into Hewlett Packard.

Dell forecast revenue for the current quarter of $14.1 billion to $14.5 billion and earnings per share of 39 cents to 41 cents. Analysts had been expecting Dell to earn 41 cents per share, on average, in the third quarter, on revenue of $14.6 billion.

Dell is still an excellent company and I see no reason to sell.

Posted by on August 15th, 2005 at 7:11 pm


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