Earnings Watch: Why Dell Will Do Well
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Research Analyst: Will Frankenhoff (5/6/00)
In times of market uncertainty (and we can safely say that this is the atmosphere we face today) investors look at certain stocks as bell-weathers of underlying economic performance. Dell Computer (NASDAQ: DELL - Quotes, News, Boards) is one such stock and investors will be watching closely as the company reports its first fiscal quarter results on May 11.
Much ado has been made about the tightness in the chip market, especially the dearth of Intel's (NASDAQ: INTC - Quotes, News, Boards) Pentium processors, which admittedly crimped Dell's earnings in the previous quarter. We believe that this concern is overblown and that chip supply, while tight, is adequate as evidenced by a recent statement made by Morton Topfer, a Dell director, who stated "We've experienced almost no limited component availability."
With that concern allayed, we believe that Dell will once again beat expectations on both the top and bottom lines. Analysts are currently estimating that Dell will record revenue of approximately $7.07 billion for the first quarter of fiscal 2001 ended April 29, 2000, a 28% increase over last year's quarter. Consensus earnings estimates are for $0.16 per share, unchanged from last year's period.
We believe, however, that Dell stands a better than even chance of reporting revenue in the $7.5 billion range and earnings of $0.18-$0.19 per share. What cause do we have for our optimism? There are a number of different factors.
The first reason is that PC shipments, after an admittedly sluggish start of the year, accelerated in March. This was especially helpful to Dell, whose quarter consists of February, March and April. According to International Data Corp., Dell grew its worldwide shipments by 31% during the period and increased its market share from 9.7% in the year-ago quarter to 10.5% in the latest one.
The growth was helped by strong consumer sales and exploding demand in the Asia/Pacific region, which offset weakness in Europe. We believe that volume gain will more than make up for a slight 4% to 5% decline in average selling points (ASPs).
Another factor contributing to our bullishness is the strength of Dell's server business, which represented 17% of total sales in the most recent quarter.
The company is already ranked the number two provider of server worldwide behind Sun Microsystems (NASDAQ: SUNW - Quotes, News, Boards) . In the most recent quarter, industry analysts reported that Dell had gained nearly 5 points in worldwide market share and accounted for more than 40% of worldwide volume growth. In the U.S., the momentum was even more pronounced as the company gained nearly 10 points of market share and sales of its PowerEdge servers accounted for 25% of all servers sold.
While we don't believe that such momentum can last forever, we believe that server sales should grow in excess of 40% to close to $1.2 billion in the coming quarter.
Dell's notebook and portable business is also showing strength as the company should remain ranked the number one provider in the U.S. with nearly a 20% market share and more than a 10.5% worldwide share.
Considering that this segment grew at a rate of over 50% in fiscal 2000, it is not unreasonable to assume a 50% growth rate in the current quarter and we believe that revenue from the portable segment could be approximately $1.8 to $1.9 billion.
Simply put, we believe that Dell will show strong growth along each of its product lines. A slight shift in the mix towards the higher margin notebook and server lines should benefit margins (even though Dell might chose to invest some of this upside in infrastructure development) and the continued shift towards sales over the Internet (over 50% of total sales in the most recent quarter) can only improve operating efficiencies.
Bottom Line:
Fear not investors, Dell shall once again exceed expectations and prove that all's well in its corner of the high tech firmament
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