CAN DELL KEEP DELIVERING?
SOMEBODY FORGOT to tell Dell Computer (DELL) that the first half of 1998 was tough on PC makers.
Dell reported another off-the-charts quarter Tuesday, with an earnings increase of 62% over last year and a revenue gain of 54%. The good numbers marched all the way through the balance sheet.
Gross margins were up 40 basis points to 22.7%, the highest mark in seven years; sales in the economically troubled Asia/Pacific region rose 34%; and the company's high-end offerings, like servers, workstations, and laptops, flew off the direct-seller's metaphorical shelves at the best clip of all.
And then there's the stock news. Shares were up 7.6% at the close on Wednesday, soaring to new highs after bouncing around with the market for the past six weeks. That puts year-to-date gains at 181%. The company also announced a 2-for-1 stock split, to be executed Sept. 4 for shares held as of Aug. 28. It's the sixth split in as many years and should open the door for some more individual investors to buy into the must-own, can't-be-stopped stock.
In the aftermath, analysts are lining up to kiss CEO Michael Dell's ring. "These guys deserve the multiple they're getting and then some," says Ashok Kumar of Piper Jaffray. Kumar raised his 12-month price target on the stock to $150, or 50 times his revised earnings estimate of $3 per share for 2000.
Wendy Abramowitz of Argus Research also thinks the stock deserves to trade at 50 times her revised 2000 estimate of $2.66. "Everything looked very positive," she says, finding no holes in the numbers. Michael Geran of Donaldson, Lufkin & Jenrette's Pershing division adds admiringly, "Given everything that's going on out there, it's remarkable."
It's hard to argue with the results. And if Dell continues to see earnings growth of 62%, then the stock might triple again next year, as it did last year and the year before. But amid all the gushing, at least one analyst thinks there are some figures investors should watch before committing their entire portfolio to this Teflon stock.
James Poyner of CIBC Oppenheimer says that the most impressive component of Dell's quarter is the combination of unit sales growth and gross margin expansion at a time when all other PC makers are having to choose between one or the other. But Poyner believes a few market conditions may be conspiring to force Dell to join the others in making a decision between the two.
First, the Wall Street Journal All-Star analyst thinks that component prices, which fell at about 1% per week during the second quarter, will stabilize as suppliers pare down their inventories and refuse to take any more losses. The falling prices of components such as DRAMs and monitors during the past couple of years have allowed Dell to cut prices while maintaining margins, but Poyner doesn't see that dynamic holding up much longer. "If component prices stabilize, you will then have a tougher choice between price cuts and gross margins," he says.
Second, despite Dell's impressive year-over-year growth of 34% in Asia, Poyner doesn't believe that the international PC market is as strong as most analyses suggest. While Dell clearly performed better than its competitors in Asia, its revenue from the region fell sequentially.
"The world dynamic is still pointing toward further slowing [in PC sales growth] as opposed to a significant pickup," he says, ticking off unstable economic conditions in Japan, Russia and China. More currency devaluations, he says, would result in "another round of pain for U.S. dollar-denominated PC manufacturers."
And then there's the continuing efforts to copy Dell's direct model. Poyner says that Compaq (CPQ) has been quietly making gains on the Internet with sales of its corporate computers and that it's only a matter of time before the world's largest PC company joins its smaller, more nimble competitor with a large-scale direct model. "They're going to be showing up here in the next six to nine months with a Dell look-alike," he says.
Compaq is currently under-pricing Dell in the corporate desktop market, and Poyner believes that margin gains from the Digital acquisition will allow Compaq to continue to pressure Dell on pricing. Meanwhile, Compaq continues to cut costs while Dell's are rising. In the second quarter, Dell operating expenses increased sequentially 13% while revenue increased 10%.
Kumar counters that the rising costs will merely ready Dell for continued growth in the U.S. and abroad. "They're putting infrastructure in place to address all the key marketplaces," he says.
And Michael Dell and the Dell bulls have answers for most of the other concerns regarding Dell's growth. For instance, Dell told CNBC on Wednesday that his company would actually benefit from a devalued currency in China because the company buys more from the region than it sells there. And, he adds, even if international PC sales slow, Dell can still grow. "You don't need growth for Dell to gain share. ... Market share will go to the most efficient provider," he says.
For now, Dell still holds the title of the most efficient provider and its stock's performance continues to reflect the company's standing in the marketplace. Even Poyner admits, "In Dell's case, they are having their cake and eating it, too."
smartmoney.com
|
