Bear, Stearns Report on DELL (courtesy of Tiger Paw)
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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End of Note
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