JMP Securities Rates Dell a Strong Buy

This is from JMP Securities’ report on Dell (DELL).

We are initiating coverage of Dell Inc. with a Strong Buy rating and 12-month price target of $45.
Dell is the world’s premier direct marketer and build-to-order manufacturer of standards-based hardware products. We believe investors should view Dell not as a technology company but rather as a sales and marketing machine that leverages the intellectual property of partners to continuously manufacture and deliver technology solutions more efficiently and at lower prices.
We believe this business model will provide Dell with a competitive advantage over the long term and should allow it to grow both sales and profits at rates faster than the market.
Dell expects to grow annual sales from $50 billion in 2005 to an approximate $80 billion within three to four years, a compounded annual growth rate of 15%. We believe Dell has compelling growth opportunities in front of it that should allow it to reach this goal.
Opportunities include diversification into products beyond PCs such as storage, printers, TVs, and different types of services. The company also has the opportunity to expand into international markets where it has a relatively small presence compared with its market share in the U.S.
Given Dell’s excellent balance sheet and ability to generate significant amounts of free cash flow, the company has the flexibility to continually reinvest in its business to improve operational performance and expand into new growth areas. This flexibility will allow the company to adapt to practically any changes in the competitive and technology landscapes in which it operates, in our view.
Shares trade at trough valuation levels. Across a number of valuation metrics, Dell trades at or near three-year trough valuation levels. Given Dell’s superior business model, excellent history of operating performance, clear growth opportunities, and rock-solid balance sheet, we believe its shares should reasonably trade near their historical average of 24x to 25x earnings.

If Dell earns $2 a share next year, which is high but not inconceivable, the stock would have to be near $50 to be fairly valued. Dell is currently trading around $33.

Posted by on October 13th, 2005 at 3:30 pm


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.