From the motley fool,
Dueling Fools argue dell.
tci
July 07, 1999
Farmers in the Dell
Bull Argument
by Yi-Hsin Chang (tmfpuck@aol.com)
To me, Dell Computer (Nasdaq: DELL) has been
and will continue to be a compelling stock story, but
it is especially interesting now considering its share
price has come down more than 30% from its
52-week high of $55 (click here for the latest stock
price). Still, Dell's long-term stock performance is
nothing to sneeze at. As this 5-year chart illustrates,
Dell has had quite a run -- yes, it's increased more
than 10,000% during that time, and that flat blue
line represents the S&P 500 index on a comparable
basis.
Dell has fallen somewhat out of favor of late due to
a whacked view that PCs will soon be a thing of
the past, not to mention an exaggeration of a slight
slowdown in growth at the company. Nevertheless,
I remain firmly bullish on the company for the long
term, as bullish as Randy Befumo was when he
wrote the Bull argument in the original Dueling
Fools on Dell two years ago.
Here are 10 reasons why Dell's a winner in my
book:
1. Dell the brand. Dell is one of the strongest consumer brands out there.
Thanks to its aggressive advertising campaign, you often hear people talk
about owning or buying a Dell -- as opposed to something from the "cow
company," as I've heard someone refer to Gateway (NYSE: GTW). Not
only did Dell pioneer the "Be Direct" sales model, it has made it into an art
form. The company was recently ranked fourth in a list of America's most
admired companies in Fortune magazine, ahead of Warren Buffett's
Berkshire Hathaway, Wal-Mart, Intel, and Walt Disney.
2. Still growing. Despite all the ruckus, Dell is still a rapidly growing
company. In the quarter ended April 30, revenue grew 41%, operating
income gained 40%, net income jumped 42%, and earnings per share
increased 45% year-over-year. Many companies would give their CEOs
for such numbers. The comparable figures for Gateway are 22%, 29%,
31%, and 29%, respectively -- mind you, Gateway is no lightweight, as Dale
Wettlaufer has pointed out many times in the Boring Portfolio. In fact, Dell
grew 2.5 times as fast as the estimated industry average.
3. Companies go Dell. Dell is the No. 1 PC vendor to small and
medium-sized businesses as well as to large corporations. The company
also has recently landed sweet deals to be the exclusive computer supplier
to Boeing, Ford, Choice Hotels (in a deal worth up to $80 million over three
years), and others. This was in addition to Dell's existing agreements with
Sara Lee and Mobil.
4. Efficient business model. Dell simply rocks when it comes to running
an efficient business. At the end of its fiscal first quarter (ended April 30),
the company had six days supply in inventory -- and you thought eight days
supply was awesome a year ago (Gateway's stands around nine days).
Dell's return on invested capital -- which measures how efficiently a
company is run and is the very basis of bonuses at Dell -- was 189% for
the quarter.
5. Customer satisfaction. Dell's direct-sell business model is by definition
customer focused. I speak from firsthand experience -- my computer at
home and at work are both Dells -- and I've been happy with my
experience. Even when my monitor at home went berserk, Dell sent me a
new one the day after I called. I simply returned the broken monitor in the
same box the new one came in, and I didn't have to pay a cent on shipping
or even lug the box to the post office; Airborne Express came and picked it
up. It was probably the most trouble-free exchange I've ever made in all
my shopping experience. Not surprisingly, Dell's excellent customer service
instills strong customer loyalty -- I'm in the market for a notebook computer,
and I'll likely end up buying a Dell.
6. Best Internet play. Dell sells more than $18 million in computer
equipment from its website every day, which accounts for some 30% of
total revenues. Founder and CEO Michael Dell envisions deriving half of
the company's revenues from the Internet by the end of next year and is
applying the Internet to its entire business. Dell's efficient direct-sell model
has made a natural transition to e-commerce. In short, it's out-'Netting the
so-called Internet companies. Here's a company that's doing business
online, and (shock) actually making money.
7. International domination. European revenues gained 29% last quarter,
while revenues in the Asia-Pacific soared 48%. In both regions, shipments
increased at more than twice the regional industry rate. According to the
June 21, 1999, issue of Fortune, Dell is well on its way to becoming a
major player in China, which is on track to surpass Japan as the world's
second-largest PC market in about five years. Dell, which opened a factory
in Xiamen in May, actually managed to increase sales during Asia's recent
economic crisis. Since it started selling PCs there last August, Dell has
already become China's eighth-largest PC maker, with a 1.2% market
share. Dell aims to control 20% to 25% of the world's PC market.
8. The PC market is alive and well. As Michael Dell said in a recent
interview with Barron's magazine, the "PC remains the preferred way to
get access to information, and it is going to be at the core of the computing
world for years to come." It will be a long time before a PalmPilot-like
device can do everything a Dell PC can, and who's to say that Dell won't
get to that point first with its ever-shrinking notebook computers? What's
more, much of the world outside of the U.S. remains void of PCs and in
need of computers.
9. Michael Dell. This is a guy who built an incredible business from
scratch. Dell started his computer business with $1,000 while a student at
the University of Texas-Austin and has since managed to grow it to the
78th-largest U.S. corporation among Fortune 500 companies with $18.24
billion in revenues last year. Think of it this way, Dell is richer than Bill
Gates was when he was 34 years old. Enough said.
10. Investor friendly. Dell is one of the most investor friendly companies
around. Its quarterly earnings press releases include such informative
details as current and quick ratios and return on invested capital. It has a
nice Calendar of Events page on its website, where you can sign up to
receive reminders via e-mail of upcoming events. The website also features
replays of its quarterly earnings conference calls and other major
announcements.
For all these reasons, Dell is without doubt one of the best companies
around. I can't be any more direct: Dell rocks, and I'm sticking to it.
Next: The Bear Argument
Dueling Fools
July 07, 1999
Farmers in the Dell
Bear Argument
by Rick Aristotle Munarriz
(tmfedible@aol.com)
Arrogance kills.
"Our business model has been so resilient that
there's almost nothing we can do to screw it up,"
Michael Dell said two weeks ago at the Forbes
CEO Forum in Atlanta.
Those are some pretty cocky words for a leader
who filed to sell four million shares of the company
just five days later. Some confidence, right? With
the stock trading for a third less than it was just five
months ago one would think that Michael would be
buying -- not selling.
Then again, Yi-Hsin may argue, selling is what Dell
does best. It's hard, even as a bear, to not look
back in awe at what Michael Dell has
accomplished. From his Longhorn college days until
just a few quarters ago Michael was all about
selling desktops and surpassing expectations.
Times have changed. Dell is no longer beating
analyst projections. Margins are slipping. As sure
as Michael may sound when he is bragging about his company's business
model, the reality is that his competitors have caught on. I think he mistook
"resiliency" for "clone-ability." Compaq (NYSE: CPQ), which continues to
hold a commanding market share lead over Dell -- 40% more worldwide --
went into direct marketing six months ago.
Michael Dell carved his company some cozy digs, but in the process of
tooting his own horn with the financials to show for it he has invited the
competition to take its business model and bolt over to Kinko's.
Dell, in response, has moved away from its core market of selling desktops
to medium and large corporations. It is now making a concerted effort to
peddle servers and workstations to companies of all sizes. Dell is also
gunning hard for the home market. What does all this mean? It means Dell
is retreating from the high margin camp that is now being raided and it's
now being transformed into just another all-purpose computer company.
The shame of it all is that the computer has become a commodity. Dell has
been forced to lower prices at a faster pace than the decline in costs of its
components. Either that or the production efficiencies just aren't coming
along quickly enough. How else would you explain the falling margins?
Prodigy (NYSE: PRGY) and America Online (NYSE: AOL) through its
Compuserve Internet Service Provider are now offering free computers in
exchange for three year service contracts. Sounds cellular? Sounds
set-top? Sounds commodity-driven? Cheap personal computers are flooding
the consumer market and if the tide continues to rise you have to believe
that corporations are the next target on the list. Where does that leave
Dell? One of the many brand names where the consumer is growing
educated enough to go generic?
The whole sector is heading into some uncertain times. Sure, sales growth
is a lock at the unit level -- but at lower, cutthroat prices and margins. Do
you really want to be buying a commodity stock at Dell's lofty valuation?
The company's market cap is more than double Compaq's market sum.
Meanwhile, Compaq is just 18 months removed from a year in which it
earned $1.9 billion -- a milestone Dell has yet to reach.
Today Dell's peers are in trouble and Michael is taking in some graveside
whistling. He points out how in the last quarter the company had 55% of
the sector's profitability on just 10% of the sales. That kind of acrobatic
bravado is mighty dangerous for a company selling at more than fifty times
earnings. One slip and the first step is a doozy. Then the dirt shovels on in.
Then the bulls of this Longhorn alum get the horns.
Next: The Bull Responds
Farmers in the Dell
The Bull Rebuttal
by Yi-Hsin Chang (tmfpuck@aol.com)
"Arrogance kills." Wow, if we were to follow
Rick's sage advice, we wouldn't have any good
companies to invest in. "Arrogance" -- some would
call it confidence -- is basically a prerequisite to
becoming the CEO of a respectable company.
Good CEOs are pioneers, visionaries; they must
exude confidence to lead their company to new
heights.
Michael Dell is definitely a visionary. The company
that bears his name is living proof of his hard work
and genius. In 1992, Dell became the youngest
CEO of a company ever to earn a ranking on the
Fortune 500. He's been named CEO of the Year
by various publications. I wouldn't call Michael Dell
arrogant; I'd call him a damn good businessman.
As for Dell filing to sell four million shares of the
company, any experienced Dell watcher -- or stock
watcher for that matter -- would know that Michael
Dell, like many senior executives across corporate
America, sell shares on a regular basis regardless
of price. Any irregular buying or selling would, in
fact, raise eyebrows. In March, Michael Dell sold 8
million shares at $41.41 a pop.
Rick claims that Dell's competitors have caught on to its business model,
but it's not a matter of "catching on" to a simple concept -- selling directly to
customers and bypassing the middleman. The key here is execution. Funny
that Rick would raise Compaq as a competitor who's "caught on." This is
the same Compaq that recently booted its CEO and CFO after
pre-announcing a disastrous first quarter with earnings per share less than
half of analysts' expectations. Compaq has a substantially lower market cap
than Dell precisely because its future is so uncertain.
Compaq and others may try to copy Dell's business model, but few will be
able to mimic its efficiency and overwhelming success. It has six days
supply in inventory! And this is a company that continues to improve its
efficiency, whether it's doing more of its business online or working to
automate its assembly line. Others will be able to make PCs and sell them
directly to customers, but they won't be able to do it as efficiently as Dell
can.
Boy, only Rick can make something as sensible as diversifying and
expanding your product line sound like a bad thing. I don't think
diversification means that Dell is becoming "just another all-purpose
computer company." It's becoming a bigger company, offering more to its
customers.
PCs are becoming a commodity of sorts, but Dell offers uncompromisingly
good service to its customers -- something that's not a commodity. What's
more, it recently opened an online superstore selling computer hardware,
software, and peripherals at Gigabuys.com. Plus, the low-end computers
Rick talks about are not in the same league as Dell computers. It's like
saying Hyundai is going to eat into Lexus sales. We're talkin' apples and
oranges here.
Don't believe Rick's mischaracterization of Dell and its prospects. Frankly,
I'll take Michael Dell at his word: "The competitive advantages of our direct
business model have never been as distinct and extensive as they are today.
We expect to continue to grow at a multiple of the industry rate, and to do
so profitably." That's not arrogance; that's a company with a strong leader
at its helm.
Next: The Bear Responds
Dueling Fools
July 07, 1999
Farmers in the Dell
The Bear Rebuttal
by Rick Aristotle Munarriz
(tmfedible@aol.com)
From the home office in Dellbear, Texas, here are
this week's top ten rebuttals...
1. Dell the brand. Right now, at Fool HQ, a sea
of Dells sit next to a collection of Compaqs -- in
perfect harmony. How can this be? True brands
stand apart. At a restaurant you don't find Heinz
next to a bottle of Hunt's. Good luck ordering a
Pepsi alongside a Diet Coke. Real brands create
buffers and that is not the case in this commodity
box world, save for maybe Apple (Nasdaq:
AAPL). Specs. Prices. Terms. Everyone is buying
the same components from the same suppliers.
2. Still growing. Yes, Dell is growing, but now at
a slower rate than analysts expected. Yi-Hsin
points out how the stock had shot up 10,000% over
the past five years and that kind of glorious return
also comes with a great deal of baggage. In Dell's
case, Wall Street discounted much loftier
projections. Losing a third of that exuberance is
only the tip of the iceberg if Dell continues to slow
down -- and sadly that's the way things are
trending. Why else would a technology company be down as the market
hits new highs?
3. Companies go Dell. My capable Dueling foe lists some recent
corporate handshakes. I guess that means I can't say that Dell sales will be
zero next year. I'm sunk. But let's put things in relative terms. She seems
impressed with a Choice Hotels deal that will average about $27 million a
year. Dell would have to line up 3500 similar contracts for the sum to equal
Dell's market cap. Yet the Choices are few. Thanks to ever-shrinking
computer prices, only a few companies are getting locked up in long-term
exclusive contracts. The old axiom about no one ever getting fired for
buying IBM (NYSE: IBM) is pretty laughable now. Computer brand
loyalty is a thing of the past. I've seen the future of office computing and its
color is mulatto.
4. Efficient business model. Dell had one. There is no way, despite being
decked out in full bear regalia, that I can deny that. However, everybody
has the bomb. With Compaq now copying the "Be Direct" model, what do
you think will happen? Competitive pressures will drag prices and margins
lower. Sure, inventory might still be lean, but don't empty out your piggy
bank to wager that Dell's return on invested capital will remain as high as it
has been in the past.
5. Customer satisfaction. I'll admit it. I've never owned a Dell computer
system. I've been through a few different machines in my life and I'm not
as clear on this brand loyalty thing as my Apple-loving wife. I appreciate
Yi-Hsin telling me that her Dell monitor went berserk, though. I've never
had a buggy monitor before so I'll make sure I stay away from the Dell line.
Maybe if I were sold a bunch of shoddy peripherals to the point where I
had to test a company's customer service department I might grow to form
a favorable opinion. Maybe? Or maybe I'd just lose my patience and move
on to the next commodity vendor.
6. Best Internet play. Dell is using the Internet like any direct seller -- as
just another medium to place an order beyond fax, phone, or mailbox. It's
not as if the 'Net will be replacing costly bricks-and-mortar locations for
Dell. Dell was lean before the Internet. Actually, maybe it's coincidence,
but as its online sales grow the company's margins shrink. Okay, it's a
coincidence, but it is misleading to compare Dell with the e-commerce
juggernauts. Compare it to an automaker like Saturn for allowing online
ordering convenience -- nothing more.
7. International domination. I'm sorry, is this a Compaq Duel? I realize
that Dell is forging ahead in Europe and doing marvelously well in places
like the United Kingdom. But, maybe it's just me, I usually associate the
word "domination" with being #1 and Dell just isn't there. The one
geographic claim that Yi-Hsin writes, about Dell being the eighth largest PC
seller in China is interesting. I imagine the market caps of the seven largest
players in China combined fall shy of Dell's ambitious price tag.
8. The PC market is alive and well. Of course it is. Computers are
getting better and cheaper. Its household penetration is almost worthy of
dubbing the PC an appliance. Which begs the question, when was the last
time you found a publicly traded washing machine or television set
manufacturer going for Dell's multiples?
9. Michael Dell. What can I say? Michael's story is amazing -- as is the
tale of every self-made billionaire. Yi-Hsin writes that "Dell is richer than
Bill Gates was when he was 34 years old." Yet Michael was even richer
when he was 33. Gates has yet to peak while Michael may have -- and he's
quite savvy for having periodically divested himself of the company that
bears his name. Comparing Microsoft (Nasdaq: MSFT) to Dell, by CEO
insinuation, is not worth much of a response. One sells a proprietary
product. One presses a four-letter word on computer boxes.
10. Investor friendly. I applaud the investor friendly companies.
Shareholders deserve the same respect and access to information as the
institutions and, no question, Dell serves its investors well. Go, Dell, Go!
However, good intentions do not necessarily go hand in hand with capital
appreciation. I'm sure Starbucks (Nasdaq: SBUX) individual investors
enjoyed getting richer while being kept in the dark for years as opposed to
being poorer and illuminated today.
Ultimately it all boils down to what you think the future will bring for Dell
and the boxmakers. The days of Dell doubling or tripling earnings are over.
Next year's 34% projected bottom line growth is impressive but it is coming
in uncertain, competitive times. Like Dell's machines, its share price has
gotten cheaper in recent months. I'm sure somewhere, somebody is saying
"no one ever got fired for buying Dell" and maybe not grasping the comedy
of an ever-changing commodity-based climate.
I know it's hard to look ahead when you have such a tempting back-story
as you do with Dell. But do it because that's what the market will
eventually be seeing. And what do I see ahead of me? My monitor. Not a
Dell monitor. And it's not going berserk. |
