DELL Analyst Meeting: 4/9/99 (Part 3, Prudential Securities)
09:24am EDT 9-Apr-99 Prudential Securities (K.ALEXY 212-778-1049) DELL
DELL: HIGHLIGHTS FROM ANALYST MEETING; RAISING PRICE TARGET
DELL: HIGHLIGHTS FROM ANALYST MEETING; RAISING PRICE TARGET
R E S E A R C H N O T E S April 9,
1999
Subject: Dell Computer (DELL--$44 15/16)--OTC
OPINION
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Current: Strong
Buy/SBI/Select
Analysts: Kimberly Alexy (212) 778-1049
Ellen Chae (212) 778-1751 RISK: High
12-Month Target Price: $60.00
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Ind. Div.: N/A Yield: N/A Shares: 2,528 mil. 52-Wk.Range: 55-16
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 1/99 $ 0.53 84.8X $ 0.11 $ 0.13 $ 0.14 $ 0.16
Current 1/00 $ 0.75E 59.9X $ 0.16E $ 0.17E $ 0.20E $ 0.22E
Current 1/01 $ 0.99E 45.4X
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o Yesterday, Dell held its annual analyst meeting in New York City.
As expected, the primary themes included a focus on the overall demand
environment, and discussion surrounding Dell's Internet, consumer and
enterprise initiatives.
o Importantly, management noted that despite weakness noted from
competitors, Dell has seen no evidence of a slowdown in end demand and
remains comfortable with the growth outlook. In fact, management noted
strong demand trends across all geographies, product lines, and customer
segments, and remains comfortable with its ability to increase revenues
sequentially by 5%.
o Dell noted that it is on track to increase its e-commerce component
of sales from 25% today to 50% over the next 2 years. This shift,
which indirect vendors are not able to replicate, is one of the main
drivers of cost reduction for Dell.
o In addition, Dell discussed its intention to broaden and diversify
its revenue and income streams by extending the business model through
the Internet. Management intends to increase the 38% of profits
currently derived from "outside the box" in the company's
consumer/small business segments by focusing on increased attach rates
of peripherals, services, financing, and software at the time of
sales.
o We believe that evidence that Dell has successfully weathered the
macro weakness in the first quarter and has also rebounded from its
execution mis-step in the fourth quarter will allow the company to
re-establish its premium to growth. We are raising our price target to
$60 from $45 using a 50% premium to our expected 40%+ growth rate.
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Dell Analyst Meeting Highlights
Yesterday, Dell held its annual analyst meeting in New York City.
As expected, the primary themes included a focus on the overall demand
environment, and discussion surrounding Dell's Internet, consumer and
enterprise initiatives focused on broadening and diversifying its
revenue and income stream.
A key theme in management's comments was that demand remained strong
across all geographies, customer segments, and product lines. And
despite weakness noted from some of Dell's competitors in the corporate
market segment, Dell has seen no change in buying and continues to
expect to grow approx. 5% Q/Q vs. industry competitors which will
likely post a 9%-10% decline.
Initiatives highlighted included:
1) Extending the business model through the Internet, particularly in
the areas of service and support, e-commerce and customer relationships.
Initiatives such as on-line help, Gigabuys and premier pages for
corporate customers have increased revenue opportunities while
maintaining relationships and lowering the costs of service and
support. Dell has seen strong acceptance of its premier pages, which
have reduced order status and technical support calls by 75% and 25%,
respectively, resulting in cost savings averaging $3-$8 per call.
In addition, the company is tracking to a $5 billion run rate with $14
million/day of on-line sales. Dell noted that it is on track to
increase its e-commerce component of sales from 25% today to 50% over
the next 2 years.
2) Increased focus on the small business and consumer markets. In the
consumer/small business segment, Dell is currently on a $3 billion run
rate worldwide (or 16% of sales). The company's goal is to increase
sales in this business to >30% - in line with market rates. The
company's growth strategy in this segment is focused on increasing the
amount of profits derived from "outside the box" with increased attach
rates of peripherals, services, financing, and software at the time of
sales. Approximately 38% of the margins are currently derived from
non-hardware sales with the expectation that this will increase over
time.
In response to questions surrounding its strategy for the sub-$1,000
market, Dell noted that its recently launched $999 desktop offering has
received good consumer response. The company maintains that it is
still able to achieve good margins at this price point. In the near
term, the company expects to the higher end of the sub-$1,000 price
range. Dell has not, however, ruled out lower price points to the
extent they can maintain profitability, as they derive an increasing
percentage of margin from associated products.
3) Increased penetration of corporate and enterprise markets. Dell
believes it can further increase its share in the corporate market from
current 20% levels. Management believes that this is achievable as
Fortune 500 customers increasingly pare down their supplier base, and
in some cases opt to work with one partner.
Over the past two years, Dell has achieved 85% growth in the enterprise
segment, moving into the #2 position for server sales in the U.S. and
solidifying their #4 rank worldwide. Storage products are just
beginning to ramp, but management noted average configurations were
tracking at greater than $100,000 per box. We believe these products
have margins in excess of 40% versus 22% corporate margins derived
today.
Investment Recommendation
We believe Dell remains best positioned to compete and that the
advantage of the direct model remains intact. With the launch of the
PIII and two rounds of price cuts on the PII, coupled with increasing
inventory levels in the channel, we believe Dell is well positioned to
drive incremental share growth in this type of environment.
We believe that evidence that Dell has successfully weathered the macro
weakness in the first quarter and has also rebounded from its
execution misstep in the fourth quarter will allow the company to
re-establish its premium to growth. We are raising our price target to
$60 from $45 using a 50% premium to our expected growth rate of 40%+.
Dell remains our favorite stock. |
