From Paine Webber - more info available via PM only, unless someone can tell me how to post it here.
PC & ENTERPRISE HARDWARE
Don Young
203-978-9100/donyoung@painewebber.com RESEARCH NOTE
Jennifer Frankot, Associate Analyst (203-978-9105) May 14, 1999
Dell Computer Corp Rating: Neutral
(DELL-$43.25)
Dell:Downgrade to Neutral;The Strongest,But Not Immune
KEY POINTS
· We are downgrading our rating on Dell Computer Corp. to Neutral from Attractive. The primary basis for our downgrade is not
company specific, but rather reflects our concerns over a difficult industry setting, which we believe is likely to get even more
difficult as the year progresses.
· To Dell's credit, the company is clearly the best positioned PC hardware manufacturer with its superior direct model execution, but
we question whether the company's “coat of armor” is strong enough to withstand a these tough industry conditions, with no
immediate relief in sight.
· One of our major concerns centers around the current pricing environment, as we are seeing increased signs of aggressive price
competition. Several industry sources, including channel players, sales personnel from within the direct channel, as well as our
own pricing analysis, indicate that, since mid-March, the pricing environment has deteriorated substantially in certain markets.
· Under current industry conditions, Dell isn't afforded the benefits inherent with a two pricing pool environment, as it enjoyed during
the first half of last year. On average, the inventory differential between the direct and indirect players has contracted from 80
days in 1H98, to an estimated 30 days for 1H99, which we believe will translate into lower gross margins for all of the PC vendors.
· With a tough pricing environment pushing down ASPs, pressure on gross margins could be difficult to offset on the top-line. We
estimate that a 1.0% drop in gross margins would translate into a 1.5 cent/share hit to Dell's earnings. Although we believe Dell
could probably absorb a 100 bp hit to margins this quarter, without taking a hit to their bottom line, we believe the company would
be hard pressed to overcome a substantial (+200 bp) decrease in gross margins.
· More than two-thirds of Dell's revenues are derived from North America, a market which we believe is showing continued signs of
weakness in PC demand. We estimate PC unit growth in the US and Latin America will increase less than 10% y/y in 1999, or half
of the levels attained in 1998. We also believe that any benefits from Y2K have most likely already been realized.
· The execution problems of the indirect channel could begin to put a drag on Dell's financials. And we believe industry risk will
continue to increase as the year progresses, given that the easy compares enjoyed by the indirect channel will dissipate in the
second half of 1999.
· We are downgrading our rating on Dell to Neutral on heightened concerns of tough industry pricing conditions. We recommend
that investors look towards MSFT($79.13)[2]as the best PC play. In the server sector, our vote goes to IBM ($246.00)and
SUNW($65.19)[2]. Although we would avoid most of the choices in the PC hardware sector, we favor MUEI($10.88)[2], a stock
that has been beaten up considerabley and represents what believe is a good value play. Our new target price is $47, or 63x our
FY00 estimate of $0.75/share.
Key Data Quarterly Earnings Per Share (fiscal year ends January)
52-Wk Range $54-20 1998A 1999A Prev 2000E Prev
Eq.Mkt.Cap.(MM) $110,028 1Q $0.06 $0.11A $0.16
Sh.Out.(MM) 2,544 2Q 0.08 0.12A 0.17
Float 77% 3Q 0.09 0.14A 0.20
Inst.Hldgs. 42.8% 4Q 0.10 0.16A 0.22
Av.Dly.Vol.(K) 28,900 Year $0.33 $0.53 $0.75
Curr. Div./Yield None/NA FC Cons.: $0.53 $0.73 $0.98
Sec.Grwth.Rate 50% Revs.(MM): $12,327 $18,242 $25,463
12-mo. Tgt Price $47.00 P/E: 131.1x 81.6x 57.7x
12-mo. Ret. Pot'l 8.7%
Convertible? No
Dell Computer Corp. designs, develops, manufactures, sells, services and supports a broad range of
computer systems, including desktops, notebooks and servers compatible with industry standards
under the Dell brand name. The company also sells software, p
KEY POINTS
· We are downgrading our rating on Dell Computer Corp. to Neutral from Attractive. The primary basis for our downgrade is not
company specific, but rather reflects our concerns over a difficult industry setting, which we believe is likely to get even more
difficult as the year progresses.
· To Dell's credit, the company is clearly the best positioned PC hardware manufacturer with its superior direct model execution, but
we question whether the company's “coat of armor” is strong enough to withstand a these tough industry conditions, with no
immediate relief in sight.
· One of our major concerns centers around the current pricing environment, as we are seeing increased signs of aggressive price
competition. Several industry sources, including channel players, sales personnel from within the direct channel, as well as our
own pricing analysis, indicate that, since mid-March, the pricing environment has deteriorated substantially in certain markets.
· Under current industry conditions, Dell isn't afforded the benefits inherent with a two pricing pool environment, as it enjoyed during
the first half of last year. On average, the inventory differential between the direct and indirect players has contracted from 80
days in 1H98, to an estimated 30 days for 1H99, which we believe will translate into lower gross margins for all of the PC vendors.
· With a tough pricing environment pushing down ASPs, pressure on gross margins could be difficult to offset on the top-line. We
estimate that a 1.0% drop in gross margins would translate into a 1.5 cent/share hit to Dell's earnings. Although we believe Dell
could probably absorb a 100 bp hit to margins this quarter, without taking a hit to their bottom line, we believe the company would
be hard pressed to overcome a substantial (+200 bp) decrease in gross margins.
· More than two-thirds of Dell's revenues are derived from North America, a market which we believe is showing continued signs of
weakness in PC demand. We estimate PC unit growth in the US and Latin America will increase less than 10% y/y in 1999, or half
of the levels attained in 1998. We also believe that any benefits from Y2K have most likely already been realized.
· The execution problems of the indirect channel could begin to put a drag on Dell's financials. And we believe industry risk will
continue to increase as the year progresses, given that the easy compares enjoyed by the indirect channel will dissipate in the
second half of 1999.
· We are downgrading our rating on Dell to Neutral on heightened concerns of tough industry pricing conditions. We recommend
that investors look towards MSFT($79.13)[2]as the best PC play. In the server sector, our vote goes to IBM ($246.00)and
SUNW($65.19)[2]. Although we would avoid most of the choices in the PC hardware sector, we favor MUEI($10.88)[2], a stock
that has been beaten up considerabley and represents what believe is a good value play. Our new target price is $47, or 63x our
FY00 estimate of $0.75/share.
Key Data Quarterly Earnings Per Share (fiscal year ends January)
52-Wk Range $54-20 1998A 1999A Prev 2000E Prev
Eq.Mkt.Cap.(MM) $110,028 1Q $0.06 $0.11A $0.16
Sh.Out.(MM) 2,544 2Q 0.08 0.12A 0.17
Float 77% 3Q 0.09 0.14A 0.20
Inst.Hldgs. 42.8% 4Q 0.10 0.16A 0.22
Av.Dly.Vol.(K) 28,900 Year $0.33 $0.53 $0.75
Curr. Div./Yield None/NA FC Cons.: $0.53 $0.73 $0.98
Sec.Grwth.Rate 50% Revs.(MM): $12,327 $18,242 $25,463
12-mo. Tgt Price $47.00 P/E: 131.1x 81.6x 57.7x
12-mo. Ret. Pot'l 8.7%
Convertible? No
Dell Computer Corp. designs, develops, manufactures, sells, services and supports a broad range of
computer systems, including desktops, notebooks and servers compatible with industry standards
under the Dell brand name. The company also sells software, p |
