Still Staying Away from Dell

I wish I could like Dell ($DELL) more than I do. The cheap price is tempting and I wouldn’t be surprised to see the shares rally from here. The problem for me is that by buying Dell here, I’m taking on more risk than I need to. One of my fundamental rules of investing is to never take risks that I don’t need to. Last month, I said I was staying away from Dell and that’s how I feel today.

Warren Buffett said, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” That’s my thought about Dell. The company just beat earnings by five cents per share. This is a good example of the quarterly earnings report not meaning much. The big news was that Dell said it expects earnings for the year of $1.70 per share which is down from the previous forecast of $2.13 per share they gave in February.

Earnings downgrades are like cockroaches: there are usually a few more for every one you see. Companies aren’t like athletes who may go into a slump or have an “off day.” If a company lowers its guidance by a lot, there’s probably a major reason why, and that reason isn’t easily fixed.

Dell, once the world’s top personal computer maker and a pioneer in computer supply chain management, is struggling to defend its market share against Asian rivals like Acer and Lenovo and consumers’ fast-growing adoption of tablets like Apple’s iPad in place of PCs.

Dell forecast that its revenue would slide 2 percent to 5 percent in its fiscal third quarter from the second, to $13.8 billion to $14.2 billion. Wall Street had been expecting third-quarter revenue of $14.85 billion.

It is predicting earnings of “at least” $1.70 a share for fiscal 2013, compared with a previous forecast for more than $2.13 a share.

“People had already expected them to take down numbers, but I think the level to which they are taking down numbers is pretty severe compared to expectations,” said Shannon Cross, an analyst at Cross Research.

Dell’s chief financial officer, Brian Gladden, said in an interview that the company had tempered its outlook for the fiscal third quarter partly because it expected distributors to hold off on buying new computers before the late October release of the latest version of Microsoft’s Windows operating system.

Using $1.70 or earnings compared to the new stock price of $11.50 makes Dell appears attractive. But I’m not convinced. I just don’t see much coming out of Dell in the way of growth. Until I’m convinced that Dell can increase its earnings at a stable rate, I don’t see much value in the shares.

Posted by on August 22nd, 2012 at 12:37 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.

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