Analysts Say Dell's Advantage Over Other PC
Makers Has Diminished
February 12, 1999 2:19 PM
NEW YORK -(Dow Jones)- Shares of fast growing Dell Computer Corp.,
a direct seller of personal computers noted for efficient production and
low prices, fell Friday after two analysts said Dell faces keener
competition from other computer makers that have made great strides in
emulating Dell's business model.
At midafternoon, shares of Round Rock, Texas-based Dell (DELL) were
down $10.125, or 9.9%, at $91.75. Volume of 52 million shares made it
the most-active Nasdaq issue. Shares of Gateway Inc. (GTW), the
second-largest direct seller of PCs after Dell, were off $4.813, or 6.3%, at
$71.188.
BancBoston Robertson Stephens Inc. analyst Dan Niles and Salomon
Smith Barney analyst Richard Gardner said Dell has less of an
advantage in its direct-sales model because other PC makers have
reduced their costs and changed their selling models. Flattening
component costs are also helping competitors such as Compaq
Computer Corp., Hewlett-Packard Co. and International Business
Machines Corp. to better compete with Dell, the analysts said.
Both analysts said Dell's sales were soft in its foscal fourth quarter
ended in January. Niles said intensifying competition caused him to
lower his estimate for Dell's fourth-quarter revenue to $5.2 billion from
$5.5 billion, up from $3.7 billion in the year-ago period.
The company plans to release fourth-quarter results late Tuesday. The
mean estimate of analysts surveyed by First Call is for earnings of 31
cents a share, compared with 20 cents a year earlier.
Niles maintained his earnings estimate of 30 cents a share while Gardner
kept his view at 31 cents a share. But Gardner said he expects no more
than "several pennies of upside."
Niles fears that Dell's average selling prices for corporate PCs declined
from the third quarter because of greater competition. "We believe that
more direct selling by competitors combined with competitive products
will force (average selling prices) further down in coming quarters," he
added. Niles had expected a fourth-quarter selling price of $2,375 but he
believes the figure declined to $2,350 from $2,355 in the third quarter.
Niles also thinks Dell sold fewer units in its U.S. corporate desktop and
server lines.
Gardner said rivals, such as Compaq and IBM, are more rapidly turning
over their inventories and that should place them at "manufacturing cost
parity" with Dell. The quicker inventory turnover results in less inventory
in the distribution channels - a problem that plagued Dell's competitors
for most of last year.
In the past, Dell's direct-sales model benefited from declining component
prices and the fact that its competitors struggled with excess inventory.
The company builds computers as orders are placed and that has
allowed Dell to quickly adjust prices as component prices declined.
"However, with component prices firming in late 1998 and continuing into
1999, we believe this will result in much less of an advantage for Dell
versus the industry," Niles said.
Niles said he doesn't think the company will miss his 1999 estimate for
earnings of $1.40 a share but he believes the stock price has been
overvalued.
Copyright (c) 1999 Dow Jones & Company, Inc.
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