From Smart Money Mag......
Shares of Dell Computer rose ahead of its earnings report after the close Tuesday. Merrill Lynch's Steven Milunovich expects the PC maker to report a "solid" first quarter, with earnings of 16 cents a share. The forecast is in line with the consensus estimate, but he said a modest upside is possible. "Although we continue to prefer enterprise stocks over PC stocks, the purity of Dell's model is attractive relative to a hybrid model. On our Virtual Visit conference call near quarter end, CFO Tom Meredith reiterated that Dell is seeing strength in all geographies, customer segments and product categories and reminded analysts that Dell historically sees a first-quarter sequential increase over fourth quarter," Milunovich said in a report.
The analyst expects Dell to generate $5.5 billion in revenue, up 40% from a year ago and up 6% from last quarter. The company's corporate business should pick up after last quarter's weakness, while its consumer business will see continued strength, Milunovich said. However, gross margins should fall to 22% from 22.4% in the January quarter and 22.3% a year ago. This is mainly because of more aggressive pricing in corporate accounts, lower margin sub-$1,000 PCs and the current shortage of LCD panels that increased pressure on notebook costs, he said.
"While the gross margin in consumer PCs is lower, keep in mind that other metrics are not so shabby. For instance, due to Dell's no inventory model plus the lack of consumer receivables (all credit card transactions), Dell has an infinite return on invested capital in this space, which means Dell can make good money at $999 (though not at $400)," Milunovich said. "Dell is not currently offering $400 to $500 PCs and is going at its own pace in entering the consumer market. This could prove to be a slippery slope, however, possibly forcing Dell's prices lower more quickly than it anticipates." The analyst also noted he's still concerned about industry pricing over the next one to two years. Milunovich is maintaining his intermediate Accumulate rating rather than a Buy, because of Dell's high valuation and slowing growth. His 12-month price target is $50. MR |
