Must read: Top Stories: The Whispers in the Dell
thestreet.com
By Eric Moskowitz
Staff Reporter
8/17/98 2:01 PM ET
Dell (DELL:Nasdaq) continues to defy expectations, even if the box maker's
fundamental strengths occasionally go unnoticed amid the clamor of its
fans' insistent and increasingly outlandish whispering.
When Dell reports second-quarter earnings after the close Tuesday,
analysts officially expect the PC maker to earn 46 cents a share.
Unofficially, traders and analysts are whispering that Dell should earn more
like 51 cents a share, more than 10% above the sanctioned target.
If Dell fails to hit the whisper number, it may well take a hit from investors
Wednesday. After all, when the company beat analysts' earnings
expectations by 2 cents for its first quarter -- but missed the whisper number
by 2 cents -- its shares lost 13% of their value. But over the next three
months, Dell shares recouped those losses and added another 12% as the
company's strength was magnified by weakness among its competitors.
It's that Dell can continue to comfortably beat analysts' earnings
expectations in such an uncertain industry climate that amazes Wall
Street. Dell's direct-sales model, which allows for quick inventory turns and
low inventory levels, seems to render it impervious to the price deflation
and inventory build-ups that have beset both Hewlett-Packard
(HWP:NYSE) and Compaq (CPQ:NYSE).
"The company is still running on all cylinders and [CFO Tom] Meredith
went out of his way to say good things a couple of weeks ago," says Matt
Glantz, an options trader with Apex Trading Group. Glantz says he is
hearing a whisper number of 50 to 51 cents for the second quarter.
"People say Dell has a high stock valuation, but why then do investors
keep buying it up?" So far this year, this perennial outperformer is up
154%.
According to one sell-sider, at least, the Round Rock, Texas-based
company has a lot more room to maneuver. "Market share is still the play
for them, and Dell only has 7.5% to 8% of the worldwide PC market," says
Mark Specker, an analyst with Soundview Financial, which hasn't been
involved in any of Dell's public offerings. "I think they can chew up another
5 share points easy." Just last month, Dell finished in a virtual dead heat
with Compaq in U.S. market share for second-quarter shipments, with
14.3% of all PC sales, according to a Dataquest survey. Dell's share during
last year's second quarter was only 9.1%.
"By continuing to add multiple share points, it fuels a lot of top-line
growth," says Specker, who rates the stock a buy and predicts that Dell will
earn 46 cents a share this quarter. How's this for top-line growth: Revenue
rose 51% in the first quarter, and Dell's five-year revenue growth rate is an
industry-topping 46%. While those numbers are hard to top, Dell seems to
keep doing just that.
Two other important fundamentals that investors should continue to focus
on are gross margins and Asia-Pacific revenues, both of which held up
nicely in the company's first quarter, which ended May 3. Around the time
when other PC concerns were struggling -- H-P preannounced for the first
time in six years -- the world's fastest-growing box maker was saying
Asia-Pacific revenues actually increased 35% from year-ago levels. Gross
margins also surprised, rising slightly to 22.3% from 21.6% in the year-ago
quarter.
That last number is significant considering PC average selling prices are
still falling by around $60 a month, according to retail trackers at PC Data.
But Piper Jaffray's Ashok Kumar, another raging Dell bull, argues that
strong unit growth will offset these price declines.
Kumar says component costs for PCs, such as those for memory and disk
drives, have fallen 40% annually, against a 13% annual price decline for
Dell to $2,350. "With costs falling faster than prices, gross margins are
expected to exhibit a positive bias," says Kumar, who rates the stock a
strong buy and sees second-quarter earnings of 48 cents a share for Dell.
Kumar warns, however, that for every $50 drop in Dell's average selling
prices, his earnings estimate drops by a penny. So if prices fall more than
6% sequentially, expect weaker earnings, he says. (His firm has not
participated in any of Dell's recent offerings.)
Investors should also keep in mind that one of Dell's fellow PC makers,
H-P, reports Monday, and its outlook is not expected to be very good. That
shouldn't be enough, however, to derail Dell's momentum. "It's almost as if
investors want to find a reason not to like them, but it's too early not to like
them," says Lou Mazzucchelli, an analyst with Gerard Klauer Mattison,
who rates the stock a buy and expects Dell to earn 47 cents a share for the
second quarter. Says the analyst, "I'm hearing unusually strong sentiment
out there for this quarter, so I would not be surprised if Dell beats my
number." (The firm hasn't done any underwriting for Dell.)
While investors should know by now that analysts almost always try to make
conservative earnings predictions, the fact that expectations for Dell are
unlike any other PC maker's show how strong this company is as the
industry heads into what is normally its peak season. So on Tuesday, the
analysts will likely be too conservative, Dell's investors will be too bullish,
and the company will report earnings that will be just right. It just may be a
Goldilocks kind of story after all.
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