Maybe Michael Dell was Right (Smart Money, 16-APR-99)
smartmoney.com
(thanks to Rusty Johnson)
Maybe Michael Dell Is Right
By Joshua Albertson
ALL OF THE great ones need to rest sometimes. Iron man
Cal Ripken took a day off late last season after 2,632 straight starts. Michael Jordan exchanged his high-tops for cleats in the middle of his string of six NBA championships. And how about George Foreman, who stepped out of the ring for 10 years before resuming a top-notch boxing career in 1987.
So, even as its stock moves sideways through the early months of 1999, it's hard to believe that Dell Computer (DELL), a technology-stock superstar, is not going to come around.
In today's SmartMoney computer screen, we searched for PC companies that meet the following criteria: year-over-year sales growth in each of the past four quarters, expanding operating margins, a price-to-earning-growth ratio less than the sector average and expected long-term earnings growth in excess of the category average. One company passed our test: Dell. So, why all the blue faces?
Well, it all started in February when it became clear that the company was no longer growing at a 50% clip. And, with the stock trading at more than 50 times next year's earnings estimates, nobody was in any mood to settle for 38% growth. The issue plunged 25% in two weeks.
The stock stumbled around for a month or so in a postearnings haze until the end of March when it began to regain its luster. By early April, Dell had bounced more than 30% off its 1999 low, and was within a couple of points of its 52-week high.
Meanwhile, Dell executives saw fit to present a fearless picture of the company's fiscal 2000 prospects at the semiannual analysts meeting on April 8. Dell's advantages over its PC competitors, assured CEO Michael Dell, are "as strong as they ever have been."
The company is gaining market share, especially among corporate customers -- a recent study by ZD Market Intelligence shows Dell owning 30.9% of the U.S. market in the large commercial segment, almost 10 percentage points more than its closest competitor. In addition, its Internet business, through Dell.com and the newly created Gigabuys.com, continues to expand and fortified relationships with partners like IBM (IBM) should enhance the company's status as a one-stop shop.
But investors didn't have much time to digest Dell's blue-sky outlook. Just one day later, on April 9, Compaq Computer (CPQ) barged in and spoiled the party. The Houston-based concern said its first-quarter earnings would miss analysts' expectations by more than 50%, thanks to diminished demand. The problem, said Compaq CEO Eckhard Pfeiffer, was "industrywide."
Investors seemed unsure who to believe, pounding Compaq with abandon, but also giving it to Dell, Gateway (GTW) and the others. Dell dropped 4% on its Texas neighbor's bad news.
There were more hard knocks in store on Tuesday. Intel (INTC), the PC industry's leading chip supplier, said that second-quarter sales would be flat to slightly down from the first quarter due to "seasonal factors." Intel hit its first-quarter earnings estimate, but the sales slowdown worried investors. Dell lost almost 6% on that news.
Wounded, the stock is now struggling to get back to 40. But as Dell's competitors and partners fight to justify their own lofty multiples, Dell hardly looks the part of the poster boy for inflated valuations any more. In fact, at 39 times next year's earnings estimates, Dell is perilously close to trading at its projected growth rate. SmartMoney had put a target price of $25 (split adjusted) to buy Dell, but the company would probably have to have an earnings disaster on par with Compaq's to reach that level in this market. If Dell had any fear of missing its first-quarter numbers (to be announced May 18), it would have piped up at last week's meeting. There's no credibility problem in Round Rock.
Roger Kay, an analyst with technology-research firm International Data Corp., says Dell looks the "best in a situation that's not all that pretty." That's no ringing endorsement, but it is a testament to the company's uncanny ability to outsmart its peers. And it is somewhat telling that, as analysts pondered the reasons for Compaq's fall, many determined that the company was having trouble trying to be like Dell.
Meanwhile, more than two-thirds of the analysts who track the stock continue to rate it a Buy or Strong Buy. So while it might be unreasonable to expect more in the way of triple-digit annual returns, this is no time for Dell investors to throw in the towel. |
