thestreet.com
Titled "Quant View: Dell's Valuation is Unsustainable" by Ted Murphy, here are some excerpts from it:
Dell Computer's (DELL:Nasdaq) price-to-earnings multiple is now higher
than Microsoft's (MSFT:Nasdaq), at 47 times 12-month-forward estimates
versus 44. I find that amazing -- and unsustainable.
The PC hardware environment is too competitive for Dell to maintain this
kind of a premium over the long term. Short term, I note that Dell is
expected to report next Tuesday after the close. Expectations are for a strong
quarter.
(Chart of price and P/E ratio since 1996)
PC makers face continuing price competition and relief seems likely to
remain elusive. As IBM (IBM: NYSE) CEO Louis Gerstner said in an
otherwise upbeat speech last Wednesday, "We're in a [PC] price war right
now, and we intend to compete and protect our market share." Gerstner's
sentiment is echoed by Compaq (CPQ:NYSE) and Hewlett Packard (HWP:
NYSE). At some point, Dell's competitors will catch up, and Dell's valuation
on earnings will contract.
I've bought 11 Dell PCs so far this year, which is a strong personal
testimonial to the quality of the company and their products, but I have no
loyalty towards Dell. For a given configuration, I'll take the cheapest box
offered by the top brands: Dell, Compaq, Hewlett Packard and IBM.
Earnings estimates and revisions for Dell continue to trend upwards, but the
rate of growth seems to be slowing.
(Chart of estimated earnings and suprises)
Dell has done a tremendous job harnessing the power of the Internet to
expand their customer base and productivity. In the process, however,
they've released the genie from the bottle. By providing an even-handed
marketing and distribution network, the Internet will continue to act as a
catalyst, driving prices on servers and high end workstations down to their
marginal cost.
The table below shows the valuation and size of the largest technology
companies in the U.S. I note that Dell's market cap is now 29 percent larger
than Compaq Computer, which I see as a further indication of Dell's
valuation being excessive.
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