another interesting article from Fortune Investor ...
Has Dell Become Just Another Growth Stock?
True, the miraculous sales pace is tapering off. That happens when you get to $25 billion in sales. Who cares? You want this stock anyway.
David Rynecki
In a surprise call with analysts on Jan. 26, Dell Computer Chairman Michael Dell was characteristically direct--and uncharacteristically bearish. Delayed supplier deliveries and a Y2K-related sales hiccup would slow the computer maker's already receding growth rate, he said. For the second straight quarter, he advised analysts to reduce revenue estimates. Hardly what we've come to expect from a company whose stock rose 88,918% in the '90s.
Was this the final act of the greatest stock performance in history? After leading the S&P 500 for a decade, Dell now ranks 392 for the past 52 weeks with a 28% decline, according to Salomon Smith Barney. Big institutional investors, believing that PCs will take a back seat in the Web-based networking boom, have been spotted on their way to the exits. "All the factors that were wind at Dell's back are now wind in its face," says Dave Magee, a portfolio manager at Duncan-Hurst Capital Management who got out months ago.
Now, wait just one minute. Is this any way to treat a stock that taught us how to turn $5,000 into our dream villa overlooking the Italian Riviera? Sure, Dell is in the doghouse, but that is less a result of poor corporate performance than of excessive investor enthusiasm, which had bid the stock so high there was no room for error. Dell today is a more diverse, better-run operation than a decade ago. And at around $38 a share, it's a screaming buy for patient investors.
Why? Three reasons: Growth is still strong, Michael Dell is still running the show, and the price is relatively cheap.
Let's start with growth. The Dell story has always been pegged to expanding sales and earnings. That hasn't changed. Dell continues to grow faster than competitors by deploying a build-to-order strategy that minimizes component inventories and cuts out middlemen. It can thus sell PCs directly to customers at lower prices and still maximize profits. Bound by contract and history to costly dealer networks, Compaq Computer, IBM, and Hewlett-Packard could only watch as Dell ate their lunch.
Year after year the company, based in Round Rock, Texas, posted 50% revenue gains and topped Wall Street's so-called "whisper number." From 1989 through 1999, sales grew at an average rate of 55.6% a year, according to I/B/E/S. The stock rose in lock step, up 97% a year. Investors had it easy. Until ...
A year ago on Feb. 16 the most natural thing that can happen to a booming company occurred: Growth slowed. It didn't stall, mind you, just ebbed. Dell reported 38% revenue growth in the fourth quarter of fiscal 1999. Investors panicked, and the stock cratered from a split-adjusted $55 to $32. Momentum players were unwilling to accept that growing from $18 billion to $25 billion is more impressive than growing from $100 million to $200 million. Continuing at 40% or 50% would be like creating a new company the size of Union Pacific ($11 billion in revenues) every quarter.
But Dell is still a growth story. Even conservative forecasters like SG Cowen's Richard Chu, who downgraded the stock shortly after the Jan. 26 call, say three- to five-year growth well north of 20% is achievable. Others accept the 30% Dell itself steered them toward. Steven Fortuna at Merrill Lynch, for example, upped his rating from neutral to buy. He argues that 32% a year is a reasonable target. The coming release of Windows 2000 along with a resumption in corporate PC demand will aid near-term growth, though semiconductor prices remain a lingering concern. Longer term, Dell will continue to grow faster than its industry, stealing share from Compaq, IBM, and lesser players like Toshiba and Acer. Estimates are that Dell, already No. 1 in the U.S., will command 18.7% of the worldwide PC market in 2002, up from 10.8% in 1999. "Dell is a high-quality growth story that is finally being viewed the right way," Fortuna says.
We can give Dell some benefit of the doubt simply because of the man in charge. Back in 1993, Wall Street was practically gunning for Michael Dell's head. After years of fantastic numbers and a roaring stock price, the company hit several snags related to its newfound girth, inexperienced leadership, and a foundering computer notebook line. The stock fell 68% between January and July, and critics questioned whether a maker of commodity boxes could take on the likes of Compaq and IBM. The unseasoned chairman was unfazed. He hired veteran managers to guide a business that clearly had matured from the days when Dell himself assembled PCs in his college dorm room. Over the next seven years, shares gained 19,000%.
Company officials say these days the chairman is focused on four areas that will potentially add $40 billion in revenues during the next few years: globalization, sales to individuals and small businesses, enterprise (servers, storage devices, workstations), and services. Sales to homes and small businesses, for example, rose an estimated 50% last quarter. Enterprise jumped 50% and is now a $4 billion business.
So if you believe Dell remains a solid company, you have to consider the stock improbably cheap. Other dominant players like Sun Microsystems and Cisco have similar growth rates but trade at multiples that dwarf Dell's current P/E of 43 on estimated 2001 earnings. Even IBM and HP carry higher relative values, despite more modest growth rates. Discounts like this don't last long. If Dell can meet estimates over the coming two or three quarters, Wall Street will take notice. Merrill's Fortuna sees Dell trading above a 45 P/E, on its way to 60. Based on estimates of $1.15 a share, that would give the stock a $69 price tag.
To be sure, the days of 89,000% returns are over. But it's hard to argue with Dell at today's prices. If you want to speculate, buy a Net stock. In the meantime, listen to Michael Weiner, a portfolio manager at Banc One Investment Advisors, who recently added to his position. Says Weiner, "We're not going to bet against Dell." |
