The Dell Bandwagon

Barron’s Jay Palmer has more on Dell.

The pessimism about Dell has gone way too far. The company, despite its recent slip, still has an excellent strategy for personal computers — an industry that itself is growing nicely — and the company has been pushing forcefully into new regions, including Europe and Asia, and into new products, such as data storage for corporations and printers for businesses and consumers.
“While it’s true that Dell can’t hope to continue growing at the same pace it did in the ‘Nineties, the growth that it can deliver will still be very respectable,” says analyst Ted Moore, who advises portfolio managers in the private banking group of National City, based in Cleveland. “Reports of Dell’s demise are premature.”
In fact, he thinks the recent drop in Dell’s stock presents a big buying opportunity. The stock, now just under 35, could well head to 50, Moore maintains.
The shares certainly don’t look expensive: They’re changing hands at 22 times the consensus earnings estimate of $1.59 a share for this fiscal year. That’s higher than the broad market’s multiple but low compared with Dell’s recent earnings growth rate of 24% and its historical P/E of 27. Dell’s multiple is well below Apple Computer’s (AAPL) 35 and not that much above those of Gateway (GTW) and Hewlett-Packard (HPQ), computer rivals from which Dell continues to steal market share.

The most overlooked part of Dell’s business is that it’s no longer just a PC company.

Playing on its established corporate PC connections, Dell now sells and services the network servers, workstations and storage systems that power corporate back-office operations, taking on both Sun Microsystems and IBM. Using its expertise from making computer monitors, the company now offers a range of very competitive large-screen plasma and LCD televisions, challenging the likes of Sony and Panasonic. Building on its direct consumer sales link, its has come out with a digital music player to compete against Apple’s iPod and a personal digital assistant that goes head to head with Palm.
Perhaps the most daring move of all has been Dell’s decision to take on HP in printers. That move began after a market study convinced Michael Dell that HP was using its high-margin printer profits, which contribute about 70% of total operating profits on just 30% of revenue, to subsidize its ailing PC operations.
The method behind the diversification is clear. “We are PC-centric,” says Rollins. “The idea was and is to look for synergies. The MP3 players uses PC components. The TVs are based on monitors, which we have long been making. The printers sell alongside our PCs, the servers go to existing corporate customers. We are looking a new areas of opportunity all the time, but you will not see Dell offer home electronic knickknacks.”
The area of servers and storage for corporations has been a big winner, thanks in part to the fact that Dell has been able to apply its build-to-order model, allowing it to offer products that are highly competitive on both price and performance. The company makes its own servers and, for storage units, produces some of its products in partnership with industry leader EMC. Limiting its activities to the biggest market — systems running on Windows and Intel chips — Dell has become the No. 1 player in the U.S. and No. 2 worldwide in just five years, beating out the likes of HP, IBM, NEC and Fujitsu.

Posted by on September 12th, 2005 at 7:20 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.