ML:Maintain BUY
Excerpts fr ML's Research 10/5/00
Dell Lowering its Forecast
At the opening of the Dell analyst meeting last night, the
company indicated that revenue growth for the third
quarter and the fiscal year 2001 (calendar 2000) would
likely come in below the current Street consensus. The
company specifically cited weakness in Europe and in
small business. At this juncture, it is difficult to ascertain
which of the two contributed more to the shortfall.
European Shortfall
Europe continues to suffer both from a demand standpoint
on the corporate side as well as from the currency
translation impact of the Euro. Though Dell typically does
a pretty effective job of hedging its revenue exposure in
Europe, the company appears to have been hurt
incrementally by the Euro’s persistent downward trend.
We still believe that demand could begin to rebound in the
last couple of months of the year and into next year given
the need for Europe to remain globally competitive with
U.S. from a productivity standpoint.
Small Business Shortfall
Though Dell claimed some weakness in small business,
several important points need to be made. First, we still
expect total small business growth to come in north of
30% yr/yr. Second, of the three segments of the market
(SOHO, transactional, and relationship) that Dell
addresses, only the relationship piece suffered lower than
expected growth. This segment has a rich mix of Internet
startups and dot-coms that typically buy richly configured
PCs in addition to servers and storage. Indeed, the
purchase behavior of these customers looks similar to that
of larger corporations. Note that Gateway’s small business
focus is primarily on the first two segments with little
exposure to the higher-end relationship market.
PC World Not Coming To End
We would not view the Dell disappointment as being
indicative of the PC market falling apart. Clearly Dell has
faced challenges in Europe throughout the entire year. This
has been the primary fly in the ointment for Dell. While this
largely has not been within the company’s control, Dell
could have done a much better job of lowering the growth
targets so as to avoid the need to keep disappointing the
Street. Clearly, management has paid and will continue to
pay dearly for this ongoing string of misses.
Cutting Revenue Estimates
We are cutting our revenue forecast for Q3 to $8.207
billion (up 21%) from $8.475 billion (up 25%.) EPS
remains intact at $0.25. For Q4, revenues go to $8.929
billion (up 31%) from $9.408 billion (up 38%.) We are
shaving EPS by a penny to $0.27. For fiscal 2002
(calendar 2001), we are cutting sales growth to 25% from
28% previously. Our revenue estimate now stands at
$40.108 billion. EPS is unchanged at $1.20.
What Should Investors Do
We expect the stock to trade down today, probably to the
mid-$20 range. Given all of the news, we expect the shares
to find support at this level. Investors need to keep several
things in mind. First, the competitive landscape really
hasn’t changed much, with the exception that Compaq has
become incrementally leaner and more efficient. This
suggests to us that the Dell model should reign superior for
the foreseeable future. Second, we think the company’s
opportunity set remains intact and is based primarily on the
empowerment of the WinTel server platform to full 64-bit
by mid-to-late next year along with accompanying high-margin
storage products and services sales. Third, Dell
needs to be viewed as a mix shift story that offers growth
characteristics in tandem with improving operating profits.
Given all of this, we think investors ought to begin to build
a position in the stock at these levels. We would caution,
however, that our growth rates for the second half of this
year and next year are subject to change.
Though we are maintaining our Buy/Buy rating on the
stock based on core value, we don’t see any near-term
catalysts to drive the shares. We still advise investors to
focus on Gateway(GTW; C-1-2-9; $51.90) followed by
Compaq(CPQ; B-2-2-7; $28.84) play. Our price objective
for Dell goes to $36, based on 30x our $1.20 EPS estimate
for next year. |
