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Technology Stocks : Dell Technologies Inc.
DELL 120.60+1.8%Jan 9 9:30 AM EST
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To: Richard Tsang who wrote (80518)11/15/1998 7:49:00 PM
From: BGR  Read Replies (4) of 176387
 
Richard,

Thanks much! This is how I see it in a very simple model. Please correct me if I am wrong, writing it out helps me to understand the rationale.

(1) Company has revenue of 100 (say).
(2) Company has expenses of 80 (say).
(3) Gross income = 20.
(4) Net income after 50% taxes (say) = 10.
(5) 5 reinvested, leaving excess cash of 5.

Now whether or not that excess cash is used to repurchase shares or not, share price is unaffected. Share price is only affected by net income increase which is calculated based on net income of 10.

(6) If total cash and debt position improves after earnings, less than 5 of the total excess cash was used to repurchase shares.

Given that DELL's net income was less than 0.6 billion this quarter and they purchased 18 million shares back this quarter, the average purchasing price of shares must have been less than 28-29 and possibly as low as 20 (assuming some of the income was reinvested otherwise). This is way below market price for shares (which stayed in the range 40-69) and was probably made possible via use of derivatives as Jim had earlier pointed out.

IOW, the premium for selling puts do not show up in the earnings statement but presumably lie dormant in the excess cash bucket and is accounted for during share buybacks. In that case, I would argue that the premium is in reality excess earnings and while share buybacks are in themselves not value additive, derivative sells are as they enable share buybacks at lower than market value. In the previous discussions the assumption was that the company buys back shares at market value, in which case it is not value additive.

So the diluted EPS is not such a bad measure of true EPS growth after all. To reach at exact figures one has to know the actual price paid by DELL in buying shares back.

-Apratim.
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