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Technology Stocks : EMC How high can it go?
EMC 29.050.0%Sep 15 5:00 PM EST
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To: John Carragher who wrote (13286)10/9/2001 11:17:13 AM
From: Gus  Read Replies (2) of 17183
 
Re: Dell's profitability

Profitable? Yes. Proportional impact on cash flow? No.

During that last 6 quarters, Dell booked a total of $2.6 billion in net income and generated $6.0B of net cash flow from operating activities. However, Dell spent 70% of its operating cash flow during that period to acquire shares at prices much higher than its market price to unwind part of its put obligations!

During the last 6 quarters, Dell acquired 98 million shares at a total cost of $4.2 billion to unwind its put obligations at a steady rate of 16-17 million shares a quarter. These purchases had an average price of $42.76, which is well above the trading range of Dell stock for most of the last 6 quarters.

As of 2Q2002, Dell still had put obligations equivalent to 81 million shares at an average price of $44. Dell needs to get its stock up above that level so that most of those puts will expire worthless otherwise it may have to spend another 70% of operating cash flow to retire those puts over the next 5 quarters or so.

My guess is that Dell is going to stretch out those puts until FY2004 once they see the PC/server upgrade cycle turn stronger. Still, the opportunity costs are very substantial.
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