The following is probably copyright Bear Stearns & CO
Subject: Company Update
Industry: Computers & Office Equipment
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
Dell Computer Corporation (DELL-66) - Buy
Upbeat Fall Analyst Meeting; Momentum Continues To Improve;
Maintain Buy
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*** Key Points. Last Friday (9/25/98), Dell hosted an upbeat,
well-attended analyst meeting in Austin, Texas. We walk away
with more confidence that Dell's momentum continues to be strong
in all geographic regions and in all product categories with no
pockets of weakness despite the economic turmoil in Japan/Asia-
Pacific and Latin America owing to the advantages of its direct
sales model. We also walk away convinced that management is
committed to excellence and is focused on continuing its
execution on its three-prong strategy of growth, profitability,
and liquidity with the potential for continued growth and
expanding margins. Management also seems committed to
international markets and is making investments in those regions
to support growth. We are not raising estimates at this time
however we believe our estimates may turn out low given the
potential for margin upside from more enterprise business and its
continued strong momentum. Our estimates are $0.27 vs. $0.17 for
the upcoming 3Q99 (October) quarter, $1.05 for January 1999, and
$1.40 for January 2000 with the potential for EPS around $2.00 in
calendar 2000. We continue to rate DELL shares a Buy.
*** Risks To Its Multiple. With its high multiple relative to
its competitors, Dell's stock and its associated volatility does
imply risks - mostly relating to its ability to execute
efficiently, to keep its information systems up to date and to
stock market volatility. These former areas have resulted in
shortfalls at other direct vendors, although Dell can offset some
of that risk with its multiple engines of growth. There is also
the risk of an industry slowdown, but we think that is a
perception issue rather than reality given the needs for
productivity. The other key risk is its ability to hire enough
people to support this growth. As opposed to the indirect
vendors who have tens of thousands of salespeople on the street,
Dell's growth is dependent on its smoothly generate additional
business while providing high rates of superior service.
*** International Opportunity. Going forward, we believe Dell -
with a worldwide market share of 9% -- has significant growth
opportunities in overseas markets as Dell's market share outside
the U.S. (14% share) and U.K (16%) is still small at only around
4-5%. We believe there is big opportunity in France (8% share),
Germany (5%), Australia (5%), Italy (2%), Japan (3%), China (1%)
and Brazil (less than 1%). We are encouraged by the
infrastructure investments being made in China and South America
to extend the success of its direct model to these new markets.
Management seems committed to growth internationally and is
taking a longer-term stance despite the current economic turmoil.
*** Margin Expansion. We believe there is potential for margin
expansion as Dell continues it triple-digit growth in its
enterprise business (servers, workstations, and storage) and
becomes a bigger part of the business mix (currently about 12%).
We also believe there is great enterprise opportunity in
international markets in Japan, Germany, and the U.K. where there
is a push to spend more on IT infrastructure to improve
profitability and efficiency to match that of the U.S.
*** Xeon availability improved. We got the sense from management
that Xeon availability, in particular the 400 MHz Slot 2 models,
has improved as the company has lowered its backlog on its
flagship PowerEdge 6300 server to 3-4 weeks from 7-8 weeks. We
believe Xeon shipments will allow Dell to show margin expansion
as well as offset declining ASPs in desktops and notebooks.
*** No Change In Estimates. No change in our estimates for FY99
(January) of $1.05 and for FY2000 of $1.40. We believe our
estimates may turn out low given the potential for margin upside
from more enterprise business, new product momentum, and growth
in overseas markets. As we look out to calendar 2000 (fiscal
2001), it appears the company has the potential to see earnings
in the $2.00 range.
*** Franchise Valuation. While Dell stock sells at a high
relative multiple of 47x our fiscal 2000 (i.e., January or
calendar 1999) EPS estimate, and appears expensive relative to
other computer systems vendors, we believe Dell deserves a higher
multiple owing to (1) its sustainable fundamental advantages from
its direct model; (2) consistency in meeting or exceeding Street
expectations; (3) potential for continued growth opportunities in
new markets and international; (4) high quality of earnings; and
(5) its strong management team. In particular, we are impressed
with Dell's ability to grow at 50%+ top-line rates despite its
large yearly revenue run-rate of about $17.3 billion. We don't
believe there are any other companies out there of this size
growing at Dell's rate from internal sources. In addition,
Dell's highest growth areas are also its highest margin
businesses (i.e. enterprise systems) which is the opposite of its
peers. We believe Dell exhibits many of the characteristics of
other "franchise" companies like Cisco and Microsoft such as the
ones we outline above and therefore we think Dell also deserves a
"rich" franchise multiple. Moreover, Dell trades at a discount
to its recent earnings growth rate of over 60%.
*** Continue to Rate Buy. We continue to rate Dell shares Buy
rating owing to our confidence that the company will continue to
execution on its three-pronged strategy of liquidity,
profitability, and growth. We are also encouraged by the
company's ability to further distance itself from the competition
by further improvement in its direct sales model by moving to the
Internet and allying with industry partners for areas it does not
have particular strength in (services, storage). The primary
near-term risk, as we see it, relates to Dell's ability to
consistently execute against its plans, but that risk is offset
by its multiple growth engines, providing some cushion for
slippage.
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Shares outstanding: 1,392 million Market cap: $91.9
billion
EARNINGS Q1 Q2 Q3 Q4
Apr Jul Oct Jan Year P/E
Current 1998 $0.13A $0.15A $0.17A $0.20A $0.66A 100.0x
Current 1999 $0.22E $0.25A $0.27E $0.32E $1.05E 62.9x
Current 2000 $0.31E $0.32E $0.35E $0.41E $1.40E 47.1x
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