World market leaves room for Dell to keep growing
San Jose Mercury News, 9/18/98
BY ADAM LASHINSKY Mercury News Staff Writer
A CHILDHOOD classmate mentioned recently that he'd put essentially his
entire life savings into one stock, Dell Computer Corp. (Nasdaq, DELL).
There's a word for that in the nation's heartland, from which he and I hail:
foolish.
Then again, there's a different word on Wall Street for what's become of my old
chum's investment: a 12-bagger. That means that, assuming he's held Dell's
stock for only three years, his grubstake has grown by a factor of 12 -- a
performance that's better by a country mile than the 80-percent-plus total
return on the Standard & Poor's 500 index over the same time frame.
Kurtis R. King, the personal computer analyst for NationsBanc Montgomery
Securities Inc., also says it's daffy -- though obviously lucrative -- to place too
big a bet on Dell. Still, he's developed a thesis that suggests that even at
current prices, Dell is the one PC manufacturer whose stock reliably will keep
rising.
King crunched 10 years' worth of data on seven big computer makers: Dell,
Compaq Computer Corp. (NYSE, CPQ), Apple Computer Inc. (Nasdaq, AAPL),
Micron Electronics Inc. (Nasdaq, MUEI), Gateway 2000 Inc. (NYSE, GTW)
and two others that have been acquired.
The results are somewhat surprising. They suggest that the broad economy
and overall trends in the computer industry have relatively little to do with
stock-price performance for PC makers. Instead, accumulation of market share
and consistency in operating results overwhelmingly explain stock
performance for individual companies.
''Changes in industry growth don't tell us a lot about what a company is going
to do,'' says King.
That's a good thing for Dell and King's other favorite, Compaq, because
industry growth and overall conditions are lousy.
The economic crisis in Asia is causing worldwide unit growth of PCs to shrink
from around 25 percent in 1994 to below 15 percent this year. Worse, revenue
growth is slowing to a trickle, an estimated 1.3 percent this year from 30.1
percent in 1995, as average selling prices are dropping 10 percent in 1998 and
will continuing falling, albeit at a slower pace, through the rest of the decade.
Where Dell shines, says King, is that there's plenty of share left to take as the
top four PC makers -- Dell, Compaq, Hewlett-Packard Co. (NYSE, HWP) and
International Business Machines Corp. (NYSE, IBM) -- account for only 37
percent of worldwide production. And because Dell is the most efficient PC
maker and consistently delivers to Wall Street, investors are willing to pay a
premium for its shares.
King says Dell can hit $75 within 12 months. It closed Thursday at $58.13,
down $1.94.
At that price, Dell is worth almost 40 times its estimated earnings for next year,
a huge forward price-earnings multiple. The S&P 500, in comparison, trades for
about 20 times next year's estimated earnings. King thinks Dell will hold up in
part because its growth rate is so much higher than the S&P's (53 percent vs. 6
percent). More, while overall corporate earnings often are overly optimistic,
King has quantified how Wall Street consistently underestimates Dell's
earnings.
Is Dell worth putting all of one's eggs in its basket? Never. Worth a handful of
eggs? If King's right, definitely.
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