Dell Drives Q2 Industry Growth from the Motley Fool at fool.com
Dell Computer (Nasdaq: DELL) continues to roll on,
gaining $8 5/8 to $118 3/16 this morning after reporting
second quarter results that again blew the rest of the
industry off the face of the earth. The direct seller of
computer systems reported its 18th consecutive quarter
of record revenues and 14th consecutive quarter of 40%
or more year-over-year growth in revenues. The company
ended the quarter as the industry's leader in profitability,
revenue and unit growth, and in asset management.
Indeed, the company's focus on economic returns on
capital rather than EPS growth are part of the reason why
the Dell model, conceptually and practically, continues to
lead the industry and create value for shareholders.
"People can point to a Dell as a example of a market mania
or people can point to things that people say about Dell
as another sign of market top, but I simply think Dell
demonstrates the limitations of looking at
accounting-based returns rather than looking at the
economic returns," said Randy Befumo of Legg Mason Fund Adviser in Baltimore.
"GAAP accounting for earnings does not capture the $1.5 billion in cash that Dell has
generated from its negative working capital float over the past 11 quarters." Once
again, free cash flow (earnings before depreciation minus capital investment and
working capital investment) ran in excess of reported earnings at Dell -- the 11th
quarter in a row for that to take place, Befumo explained. At its highest point, free
cash flow was running at 323% of reported earnings. All of this takes place by design
at Dell, it's not just an accident.
Because the company has focused so intensely on asset management, it was able to
take advantage of a decline in component pricing this quarter that at its worst point
reached 1% deflation per week. When you turn your entire inventory once every 168
hours, there's a lot of leverage to be gained over flat pricing, as a big part of cost of
goods sold is dropping at 41% annual rate. This was a major factor in the company
reporting a 72% rise in Q2 EPS of $0.50 and in growing revenues 41% year-over-year.
Put together with the $116 million in cash generating from another reduction in
working capital, the company generated 217% return on invested capital and $641
million in cash from operations. Having accounted for half the industry's growth in the
quarter, it's pretty hard to find fault with the model and the financial performance of
Dell. The bears should choose their logical arguments carefully when trying to dissect
this company. |
