| | Dell: As Steady as It Gets in Tech
It has been consistently strong through the downturn. Will its diversification efforts help it break out of a narrow trading range?
Had you been prescient enough to invest $1,000 in Dell Computer in January, 1990, you'd be sitting on more than $500,000 today. But say you weren't so psychic, and instead you waited until the bursting of the Net bubble had sliced Dell's once stellar stock price in half. How much would $1,000 invested in early 2001 be worth today? About $1,000.
Dell's shares, whose value rose faster than any other in the Standard & Poor's 500 stock index during the 1990s, today trade at around $27 -- or about the same price they did two years ago. While the broader market has plunged and rebounded in a series of bone-jarring moves, Dell (DELL ) shares have bounced gently between $22 and $30 a share.
What's Dell's secret? Efficient factories and direct sales keep costs low, allowing the computer maker to undercut competitors and steal market share, especially while demand has been soft. And because Dell collects from many customers long before it fills orders, it has little debt. In 2002, Dell, No. 14 on the annual BusinessWeek 50 list of top-performing companies, expanded sales 14%, boosted net income 70%, and kept its debt-to-equity ratio a lean 10.4%.
HEFTY PREMIUM. Having proven it can outrun a technology recession, Dell should see its shares soar as investors gain confidence, right? Probably not. Dell's valuation remains rich -- 27 times expected earnings for fiscal 2004, which ends Jan. 31, compared to 13 times for rival Hewlett-Packard (HPQ ). Part of that premium is due to Dell's dependable execution, analysts say. It hasn't had to guide Wall Street lower for seven straight quarters and has remained free of accounting scandal and management missteps.
Wall Street is already factoring in a repeat of the vigorous growth Dell managed in 2002. A survey of analysts by First Call shows that they expect revenue to increase 14.4% in 2003, to $40.5 billion. "It's a big number to sustain," says Merrill Lynch tech strategist Steve Milunovich. He rates Dell shares neutral but notes that the outfit is "fundamentally… in great shape." And with Dell's average PC prices continuing to drop, it needs a boost in overall info-tech spending to generate bigger growth that can goose the stock, Milunovich says.
Trouble is, Dell acknowledges, it's facing the same reluctant tech buyers as the rest of the industry. With the economy in low gear, spending on computer gear will rise just 3.7% in 2003 as big corporations make do with less, according to market tracker IDC. Investment bank Credit Suisse First Boston, for example, has moved to replacing only 10% of its PCs each year, according to a recent report by Kevin McCarthy, a tech analyst at the firm. Says Dell CEO Michael S. Dell: "We're not anticipating massive growth for the industry this year."
However, the biggest lid on Dell's stock growth may be perception, analysts say. Despite continued, quick expansion in new product lines such as networking switches and PDAs last year, Dell still generated about 80% of revenue from PC and notebook sales. That can be hard to swallow for investors who know the PC industry has matured and profits dissipated. Dell executives note that the outfit has been continuing to generate fast growth in its core product lines, masking what would otherwise be progress in changing the product mix.
BRANCHING OUT. But Banc of America Securities' Joel Wagonfeld thinks more profitable sales of storage gear manufactured and sold in tandem with storage giant EMC (EMC ) will be one key to assuaging such doubts. In the fourth quarter, external storage sales hit a company record of $300 million and likely generated much more in add-on sales of servers and services, says Wagonfeld, who rates Dell a buy. To break out of its trading range and hit his 12-month price target of $34, Dell needs more of the same, notes Wagonfeld: "It's very important for Dell to further penetrate spending among its customers."
Michael Dell agrees, and last year he set a goal of hitting $60 billion in revenue in four or five years, half from non-PC products. Until then, though, Dell investors may have to be happy to just have their heads above water while many a tech concern's shares remain submerged.
MARCH 24, 2003
Park writes for BusinessWeek from the Dallas bureau
Edited By Beth Belton |
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