I'm going to say something heretical. Dell isn't overvalued.
Not undervalued either now, about right. And I'm not
a momentum investor either. Basically a high growth
value investor (unfortunately, didn't get into Dell until
and average price of about $90).
All the focus is on how far Dell has risen & how fast.
Well, its a factor, and a good correction is always possible and
at some point likely. 10-20%. Probably with the market.
But you won't see an AOL or Iomega type crash. IMHO.
Why? Well Dell's trailing EPS growth rate is 99%. No sign
of significant slowdown. No one expects Dell to keep
up that pace, but 34-45% over the next 3-5 years is likely.
Sure, the long term growth rate of PC boxes is about 17%,
according to the industry consultants (Dataquest, etc.)
Dell will grow at least twice industry rate. (Has been
doing better than that for years.) Why? Major industry
consolidation. MAJOR. The Packard Bell's and MicroAge's etc.
are fallling by the wayside. Most will DISAPPEAR.
Fact is, Dell's financial performance simply BLOWS AWAY the
rest of the industry. It doesn't even look like it is
in the same industry. Its inventory turns are among
the best in US industry. It is a leader in implementing
Supply Chain just in time efficiency software (perhaps
THE leader) in all of US industry.
Further, marketing. Dell has undergone a paradyme shift.
That is what Wall Street has finally realized. Hense
the multiple expansion. Dell has now become one of the
very few preferred names in major (Fortune 500/1000)
enterprise accounts. Used to be just IBM, Compaq or HP.
Usually just one for desktops, perhaps another for servers
or workstations. Well, Dell is increasingly THE one for
desktops. And almost everywhere is approved as one.
That is hard to break into. But Dell has done it.
So Dell is taking share from everyone. And the overpriced
server market is wide open. Dell is poised to take major
share there too.
So, its true Dell doesn't have a quasi-monopoly position
like Microsoft or Intel. So Dell's position is less secure,
although the jury is definitely out as to whether Compaq
can attain the efficiencies of Dell. What Dell has is
a marketing lead and manufacturing, and distribution lead.
Smart management. It's also true that unlike some hot
software co's, somebody can't just invent a better algorithm
or interface and take away major market share (as can
happen in help desk, semiconductor planning software, etc.)
So forget that Dell once traded at multimples that evaluated
it as a flash in the plan, fly by night commodity
discounter. It has a long term proven record of taking
market share, low cost producer, award winning designs
among the first to market, and now massive corporate
American approval/presence/installed base. So maybe
it should sell at a multiple of 12 mo. forward earnings
equal to its long term (3-5yr) growth rate. But not at
a premium to that, like Microsoft, most other software
cos, P&G, Coke, etc.
35 x (first call 12 mo out First Call earnings)=
35 x (average of cal 97 & cal 98)=
35 x 5.23 = 183
currently 170 ... so only 8% to go in the next 6 months
so before it is overvalued.
But to sell??? Nope. Not if I want to reinvest the
money. Would have to drop to the $135 level for me
to get the same longer term gains, after tax, after reinvesting.
I'd have to expect a drop to $115 or so to be worth the
risk that it wouldn't go that far down. And to that
I say no way. On present evidence.
One man's opinion.
That's my take. |
