Defensive Accounting
Posted by Eddy Elfenbein on September 12th, 2005 at 7:43 am

Hewlitt Heiserman Jr. has an interesting article in Barron’s on the limitations of GAAP accounting and traditional income statements. He advocates “defensive accounting.” He gives high marks to 3M, Dell, Blue Nile, Pepsi and UnitedHealth Group

The Dell Bandwagon
Posted by Eddy Elfenbein on September 12th, 2005 at 7:20 am

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.

NYT Profile of Dell’s CEO Kevin Rollins
Posted by Eddy Elfenbein on September 12th, 2005 at 6:13 am

The New York Times looks at Kevin Rollins, the CEO of Dell.

Mr. Rollins was living in Boston, a partner at Bain & Company, the management consulting firm, when he was asked to fly to Austin in 1993 to meet with executives at Dell. He readily acknowledges that he was hardly thrilled about the assignment. “Texas is a lo-o-o-ng way from Boston, in many ways,” he said. He had worked primarily with aerospace companies before his partners asked him to help what was then a modest-size computer company on pace to lose $100 million that year.
Just before Mr. Rollins arrived, Dell announced that it would sell its computers at Wal-Mart stores, as well as continuing to sell directly to consumers over the Internet. Breaking into big-box retail outlets, Dell said, could bring in an additional $125 million in annual revenue – and rapidly build its brand name.
Mr. Rollins promptly suggested that Dell scuttle the deal, telling a meeting of top Dell executives that the arrangement, over time, would prove to be a money loser. He apparently made a persuasive case. Within days Mr. Dell said he asked Mr. Rollins to end the company’s agreements with retail chains. After that, Mr. Dell added, “very rapidly Kevin became a critical part of the senior management team” – although he was still technically a consultant.
Largely, his work involved bringing a basic management discipline to a company that had been growing so fast that even Mr. Dell was inclined to acknowledge that things were something of a mess. Over the next several years, Mr. Rollins would spend weekends with his family in Massachusetts and his weekdays with Dell in Texas – essentially functioning as if he were a top executive working within Dell. “It was all extremely odd,” Mr. Rollins said.

Rollins doesn’t seem particularly worried about Dell’s long-term outlook.

Among Mr. Rollins’s gifts as chief executive, those around him say, is what Mr. Bell, head of Dell’s European operations, calls his “tight messaging.” So crisply does Mr. Rollins convey the Dell line, said Roger L. Kay, the founder of Endpoint Technologies Associates, a research firm that monitors the personal computer industry, that it is “a little bit scary how everyone from the highest to the lowest employee is on message.”
Today Mr. Rollin’s message is that everything is fine at Dell, despite a depressed stock price—now at $34.65, down 17 percent for the year. Dell may be the leading computer maker in the world, but it is No. 2 in Europe and No. 2 in Asia, leaving plenty of room for growth there.
There is also plenty of opportunity for growth in other product areas, like printers, which Dell has been selling for less than three years, and plasma televisions, which it has been selling for less than two years. The company is making progress in selling the more expensive equipment used in corporate data centers, and it is starting to do a brisk business in consulting. So what if its stock has fallen more than 12 percent since disappointing Wall Street last month?
“As our big strategic initiatives capture share and profits, the profits we deliver will go up and our stock price will naturally rise,” Mr. Rollins said. “We have a lot of room for growth for a long time before we have to ask what’s the next vision thing. It’s really a matter of execution.”

Crossing Wall Street Four Years Ago
Posted by Eddy Elfenbein on September 11th, 2005 at 9:43 am

Micro-Caps
Posted by Eddy Elfenbein on September 9th, 2005 at 4:15 pm

There’s a lot to like in small-company stocks. I’m greatly indebted to Dr. Ken French of Dartmouth who keeps a terrific data library at his Web site. I downloaded some files and did a little research.

Over nearly eight decades, the smallest 10% of stocks—called micro-caps—have been the top-performing size category of all stocks. From mid-1927 to the end of 2004, micro-caps are up over 2,000,000%. That comes to 13.45% a year. The largest stocks have done the worst, up a measly 140,000% or 9.70% a year. Since the market’s low in 1932, micro-caps are up over 10,000,000%, or 17.35%. (If I had only known!)

The problem with micro-caps is that although the out-performance premium has been quite generous, it’s also been very volatile. Since July 1983, Micro-caps have underperformed the largest stocks. Micro-caps have had an amazing turnaround since March 1999. Since then, the small fries are up over 250%.

Intel & Texas Instruments
Posted by Eddy Elfenbein on September 9th, 2005 at 3:15 pm

As I expected, Intel narrowed its sales forecast for this quarter. The chipmaker now sees revenue of $9.8 billion to $10 billion. Last year, it had sales of $8.47 billion so this will be a good quarter. The company’s CFO said that gross margins will top 60%. Wall Street expects earnings of 36 cents a share. Right now, Intel has dropped about 80 cents in today’s session. Texas Instruments raised its sales forecast to $3.48 billion to $3.62 billion. TXN is trading about 20 cents higher.

American Technology Research on Dell
Posted by Eddy Elfenbein on September 9th, 2005 at 3:04 pm

Not everyone hates Dell. Shawn Wu of American Technology Research sees a bargain:

We view the nearly 20% pullback in shares of Dell as overdone. We believe investors have turned overly bearish from overly bullish in an amazingly short period of time following Dell’s disappointing July quarter results and guidance and as a result we are upgrading the stock to Buy.
We find the risk-reward ratio at current levels attractive trading at 18 times our 2006 earnings per share (EPS) of $1.90 (and 15x excluding $5.11 in net cash) and see more upside than downside.
Our $43 price-target implies 24% upside and assumes a 20x multiple, which we believe is reasonable for a company with a long-term EPS growth rate of 15% to 17%.
In our view, Dell’s fundamentals have not changed that materially over the past few weeks. Dell remains among the best-positioned in hardware with its direct model, world-class low-cost supply chain, and broad product line.
Our checks with resellers/channel partners and Taiwanese motherboard manufacturers as well as recent commentary from PC food chain semiconductor suppliers give us confidence that the PC segment is positioned to grow at or above seasonal rates, particularly in mobile computing.
While it is early with nearly seven weeks left, we remain comfortable with our above consensus October quarter forecast of $14.5 billion in revenue and $0.41 in EPS (consensus at $14.3 billion and $0.40). We believe January quarter consensus revenue estimates may prove a tad too high, but we believe this concern is reflected in the pullback in Dell shares.
What could go wrong? On the macro level—if investors focus more on high energy and oil prices, Dell could fall with the broader market. At the company level if Dell may continue to not execute like in its July quarter.
We are, however, giving management the benefit of the doubt due to its relatively strong track record over a long period of time. We believe management is focused on fixing its miscues. In addition, we believe investor expectations have been reset with the pullback in shares.

Favorite and Least Favorite Stocks
Posted by Eddy Elfenbein on September 9th, 2005 at 2:42 pm

Mark Hulbert just came out with the September issue of the Hulbert Financial Digest. This is the newsletter that tracks other newsletters. My favorite part of each issue is where he lists the favorite and least favorite stock picks of newsletter editors. Usually, several stocks make both lists. This month is unusual because only three stocks are on both lists. The three stocks are Pfizer, ConocoPhillips and Toll Brothers.

The #1 favorite stock is Pfizer. This isn’t much of a surprise. There’s a lot like about Pfizer and the stock is down. I would stay away from the stock for now. Here are the top 10 favorite stocks of newsletter advisors and how many newsletters recommend them:
Pfizer 17
Bank of America 12
Johnson & Johnson 12
Microsoft 12
Newmont Mining 12
Berkshire Hthawy“B” 11
Citigroup 11
Home Depot 11
Intel 11
Unitedhealth Group 11

Here are some of the least favorite:
Cisco Systems 5
Nasdaq 100 5
S&P Spyders 5
Select Energy SPDR 5
Toll Brothers 5
Johnson & Johnson 4
Pfizer 4
Amerigroup 3
Bard CR 3
Conocophillips 3
Infosys 3
Ishares Biotech 3
Ishares Russell 2000 3
KB Home 3
Nordstrom 3
Nucor 3
SS&C Technologies 3
Seagate 3
Starbucks 3
Yellow Roadway 3

S&P Nears Four-Year High
Posted by Eddy Elfenbein on September 9th, 2005 at 1:14 pm

The stock market is recovering quite nicely from last week. Last Tuesday, the S&P 500 came very close to going below 1,200. Now the index is above 1,240 and is close to its recent high. On August 3, the index reached an intra-day high of 1245.86 and a closing high of 1245.04. That was the highest mark since 9/11. The previous high was on June 12, 2001 when the S&P closed at 1254.39. Since then, corporate profits are much higher.

Here’s a chart of the S&P over the past two weeks.
View image
And here’s the S&P 500 since June 2001. View image

Brown & Brown
Posted by Eddy Elfenbein on September 9th, 2005 at 12:50 pm

One of my favorite insurance stocks, Brown & Brown, was recently upgraded by Legg Mason. I like the stock anyway, but I think it’s especially good right now.

The company is extremely well run and has never had a lost in nearly 70 years of business. Operating margins are expanding, however legal expenses are weighing them down. Despite rising profits, the stock has been in a trading range for most of the past year.

The company had two offices in New Orleans. Obviously, they expect too many claims and Brown said that the first estimates will be probably be low. He also said that it probably won’t impact rates nationwide, but it will have a major impact in the south. In fact, Brown said that there will be big problems in Florida in November and December due to a lack of capacity. Firms will simply not underwrite policies. If this is true, it will certainly impact the real estate market. Officials now estimate that the damages of Katrina at $125 billion.

You can listen to J. Hyatt Brown at Keefe, Bruyette and Woods insurance conference. He’s a bit of a character. I could see him in talk radio. (Brown was actually speaker of Florida State House.) He said that his goal is to grow EPS by 15% ad infinitum. I was surprised to hear him say positive things about Sarbanes-Oxley.

Here’s a transcript of an interview from a few years ago.