BREAKFAST WITH THE FOOL
Thursday, January 27, 2000
"It is a bad plan that admits of no modification."
-- Publilius Syrus
Dell Misses Estimates, Not Big Picture
By Richard McCaffery (TMF Gibson)
Direct sales PC company Dell Computer (Nasdaq: DELL) fell
in after-hours trading last night after warning investors that fiscal
fourth-quarter earnings (excluding extraordinary items) will fall
about $0.06 shy of analyst estimates.
The company said a shortage of semiconductor components
and delayed purchases due to Y2K issues led to flat
year-over-year earnings and slower-than-expected sales growth.
Further, Dell said investors should expect 30% revenue growth
from here on out since the Round Rock, Texas manufacturer is
now a $25 billion company.
Naturally, there was much wailing about the shortfall. I even
heard one industry observer suggest Dell has gone too far with
its just-in-time manufacturing approach, the implication being it
will need to pad inventories a bit to meet blistering demand.
Good thing Michael Dell is running the company, not this guy.
It's not significant that the company missed estimates, plain
and simple. Bumps in the road such as Y2K and fluctuating
component supplies are part of doing business in the
technology industry, and Dell will get things straightened out.
For the long-term investor, these jags are no big deal.
It is significant that the company's sales growth will slow to
30%, mainly because Dell's growth rate has defied gravity for so
long. We knew the slowdown was coming, but it's still an event
when it happens.
What's forgotten in the earnings stir is that Dell is a better,
more profitable company today than it was a year ago. That's a
fact. In terms of its ability to generate cash, which is a major
component of what determines a company's intrinsic value, Dell
is actually picking up speed.
Look at Dell's third-quarter income and cash flow statements for
the last three years.
First Nine Months 1997-1998 1998-1999
Revenue growth 52% 41%
Net income growth 57% 18.8%
Cash from operations growth 68% 83.5%
Free cash flow growth 64% 95%
Sure, the company's sales and earnings growth have slowed,
but that's just what's happening on the surface. I highlighted the
cash flow numbers since they're the best measure of Dell's real
profitability, and you can see they're growing fast. As the
company's influence, market share, and scale have increased,
Dell's efficiencies flow right to the bottom line. There's no
indication that won't continue.
As for concerns about PC growth slowing, we hear it every
year. Overall, growth seems to be slowing, but Dell is growing
two to three times faster than the computer systems market,
which means it's capturing market share in a very fragmented
industry. Further, the company has barely scratched the
surface internationally.
As for the growth of information appliances -- believe it when
you see it. Most of us do the bulk of our work on PCs and I
think it will stay that way. Sure, I'd like to surf the Web in my
car, but that doesn't mean I don't want a PC at home and in the
office. Besides, if information appliances do take off, Dell will be
right there.
Not that the company doesn't have issues. The missed
estimates/slowing sales growth story has to be reported, and
it's worth tracking. Just don't miss the forest for the trees. In my
opinion, the company's greatest challenge is the need to keep
customer service levels high since there's been anecdotal
evidence it's been slipping. Also the company needs to
increase penetration in the server business.
For the long haul, however, Dell has the technology,
management team, and business model to reward shareholders
for years to come.
News to Go
Life insurance company John Hancock (NYSE: JHF) raised
$1.7 billion by selling 102 million shares at $17 a piece last
night. The shares will begin trading today on the New York
Stock Exchange.
Optical networking equipment company Sycamore Networks
(Nasdaq: SCMR) will split its stock three for one on February
14. Shareholders on record as of February 4 will receive two
shares for each share they own. Sycamore closed last night at
$300 1/16.
Pharmaceutical company Eli Lilly (NYSE: LLY) reported that
fourth-quarter net income (excluding one-time events) increased
22% to $671.7 million, or $0.61 per diluted share, compared to
$561.6 million, or $0.50 per diluted share, a year ago. The
results were in line with analyst estimates.
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