Hi, Kemble,
I have a friend who worked at Bear Stearns. While perusing their website, actually trying to find the location of the offices...I ran across this report on Dell. I am so horrified and saddened at the evil that has penetrated our great nation. I have every confidence that those responsible will PAY.
Dell Is Near-Term Beneficiary of Industry Consolidation
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Dell Computer Corp.
(DELL - $21.28)
Rating: Buy
EPS: FY2001 - 0.84 FY2002E - $0.63 FY2003E - $0.75 Target Price: $35-$40
Andrew J. Neff
(212) 272-4247
aneff@bear.com
William Hand
(212) 272-5928
bhand@bear.com
Naveen Bobba
(212) 272-4237
nbobba@bear.com
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We are upgrading Dell from Attractive to Buy. We believe it is positioned to benefit from industry consolidation and could see market share gains accelerate as Hewlett and Compaq work to integrate operations and brands. Our price target for Dell remains $35-$40.
Although we recognize the near-term challenges in the PC industry, we think that Dell is positioned to leverage its more efficient direct model, which enables it to be profitable (7.2% operating margin last quarter) while its competitors were unprofitable in the same business segments.
Looking at the big picture, as we noted in our PC Manifesto report in January 2001, we believe that the PC industry is ripe for structural change - as is evidenced by the Hewlett-Packard/Compaq merger announced on September 3 - we still expect to see additional companies cutting back, retrenching operations, and restructuring.
In general, we believe that Dell is still best positioned in the PC industry owing to its strengths in terms of liquidity (strong balance sheet), profitability (highest margins), and growth (increasing share gains). We are maintaining our estimates for FY2002 (January) at $0.63 and FY2003 at $0.75.
We are raising our rating on Dell from Attractive to Buy as we see it in a superior position to emerge a winner from the ongoing price war and consolidation with its cost leadership and a direct model that enables it to stay ahead of industry price dynamics. Although the stock is not cheap on a historical basis and is trading at 2x our FY2002 revenue forecast, it is still at the lower end of its recent range. Owing to its superior model, we see a compelling risk-reward scenario for the stock from current levels - a 3x multiple on our FY2002 revenue estimate, which is reasonable in our view, implies potential upside to the $35-$40 range.
The primary risks to our upgrade include (1) the current weak demand outlook; (2) how investors perceive the combination of Hewlett-Packard and Compaq; (3) Dell's ability to capitalize on fallout from the merger; and (4) the long-term demand outlook for PCs.
Investment Thesis
Dell is positioned to show continued high rates of growth in revenues and earnings owing to its ability to leverage its direct model into a compelling cost advantage over other PC vendors. Moreover, Dell is extending this model into other product segments (higher-end servers and storage and Internet-related services).
Positives/Strengths
--The company is a category leader in PCs owing to the advantages of its direct model.
--Dell has the best supply chain logistics owing to its direct model.
--The company is positioned to become the global leader in PC/servers - currently, it is the leader in the U.S. and the United Kingdom.
--International opportunity - although Dell has market share around 25% in the U.S. and more than 20% in the U.K., its market share in the rest of the world shows large upside potential.
--Dell is expanding into the following new markets: higher-end servers, storage, and consulting.
--The company is effecting favorable mix shift trends toward notebooks and enterprise (servers, storage, workstations).
Concerns
--Revenue growth rates have been slowing - the company needed to "lower the bar" five times in the past year.
--Theirs is a highly competitive market that is experiencing tremendous overcapacity, coupled with greater direct efforts by IBM, Compaq, and Hewlett-Packard.
--The company has experienced slowing industry demand and eroding margins owing to aggressive pricing moves.
--The company has little proprietary technology - it spends only 1%-2% of sales on R&D. |
