Apologize if this has already been posted much earlier in the day. It's from iionline.com
(I'm new to SI, although I've been lurking a while. Am long Dell.)
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Downgrading Dell to Sell on Valuation Concerns (2/12)
Individual Investor Online Analysis
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Arguably the best-run computer maker in the world, Dell Computer has delivered outstanding growth for most of this decade. Over the last five years, the company has boosted sales 43% annually, leading to a 51% annual per share earnings gain over that period. And investors have bid up the shares accordingly, with the stock doubling in each of the last three years. Since recommending the company in mid-November, the company's shares have appreciated an additional 45%.
But a variety of factors have caused us to become more cautious on the outlook for shares of Dell. For starters, we are increasingly under the impression that PC sales may slow sharply in the second half of 1999. The PC industry has continually posted growth rates that surpass expectations. But with looming Y2K concerns, coupled with near-term market saturation, corporate and consumer expenditures on computer-related hardware could soon slip.
Another concern: Massive amounts of insider selling. This last Thursday alone, 1.43 million shares were registered for sale. This continues a pattern of insider sales that began last summer. It's hard to be bullish on a company when insiders seem so pessimistic.
Lastly, the stock now sports very rich valuations. At a recent $94, the shares trade for 89 times Fiscal (January) 1999 earnings and 68 times Fiscal 2000 earnings. Earnings are set to grow 39% this year, but that growth should slow sharply by Fiscal 2001. Which begs the question, will the company continue to merit such a large multiple. We no longer think so.
Though the company's longer-term outlook still looks quite robust, investors should avoid the shares of Dell over the near-term.
Analyst: Dave Sterman
Updated on February 12, 1999 with DELL at $94
Recommended on 11/16/98 at $63.19
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DELL Analysis Archive
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