LONGonDELL
My step-brother wrote this analysis. I thought I would share it with you all. I thought it was very good.
Dell's *trailing* earnings are about 62, from the last four quarters
(previous the recent record setting profits). Yahoo has them at 67.7 as
of today (8/21/98) but this is not correct; the 8/18/98 release of
earnings is not updated.
Northern Trust has *current* (future) earnings *estimated* to come in
at 56, and this is without the most recent period.
The latest earnings report came in 62% higher than Wall Street
expectations. The Dell Second Fiscal Quarter ended August 2, 1998, with
earnings of $346 million on total revenue of $4.33 billion, up from
$2.81 billion a year ago...earnings of Dell "overshadowed" (from the
_Wall Street Journal_) the *combined* earnings of its four largest
rivals for the *second* straight quarter: Compaq, Hewlett-Packard,
Gateway, and IBM. HP and IBM reported their PC operations *lost* money.
Revenues were up 54% from last year's $2.81 billion. Revenue from
servers and work stations was up 141%, notebooks up 84%, and desktops
were up 42% (its largest business).
In a year when Aisa is blamed for problems in the industry, Dell's sales
in Aisa, as everywhere else in the world by region, grew: up 34%.
Gross profit margin was 22.7%; up from 22.2% a year ago.
Why does Dell succeed while others fail?
"Dell's efficiency at direct sales and custom-building computers, along
with its success at boosting sales of high-margin computers, has
insulated it from the pain of lower average selling prices. Most PC
makers have had to sell many more computers to make up for sharply lower
average prices.
"Dell's average selling price in the latest quarter was about $2400, Mr.
Dell said, just off the $2475 of the first quarter, but down from $2700
a year ago.
"For the third quarter in a row, Dell maintained just eight days worth
of inventory, which helps keep costs low and allows it to quickly adapt
new technology into its products."
--_WS Journal_, 8/19/98, p. A3
In my *opinion*, the last paragraph is paramount to Dell's success.
Previously, it *paid* to have a large inventory of component parts, but
not too large; you wanted to stockpile such items as DRAM memory which
was always *rising* in price, while holding onto the *right* amount of
chips, hard drives, etc...not too many, so that you would be stuck with
older, less advanced component parts, but still enough to take advantage
of lower pricing, as components mostly increased in cost.
Combined with innovative marketing, and Dell's *first* in the industry
web site, was pulling in $1 billion in sales, the combination of
specific marketing, high end products, and tight financial control over
costs, enables Steven Dell, age 33, to be worth $11.2 billion with his
16% stake in Dell, at 8/19 prices...starting from a dorm room, building
computers.
Today, the computer business is a commodity, and new machines are not
the quantum leaps in performance and features they were just one or two
years ago. The sub-$1000 box is a very capable performer, far better
than many have a need for (never meeting, however, the demands of
certain users who need an advanced, powerful computer such as Dell
makes, and they seem to have the very *best*, most advanced PCs...even
more powerful than Gateway's, with 400 MHZ chips, advanced multi-media
capabilities, etc), and this cheap computer has slashed profit margins,
while also gaining about approximately 40-45% of the *entire* PC market.
Dell buys just the components it *needs* ("eight day inventory"), takes
advantage that today, component parts are **dropping** in price; buy a
component today for $25, next week it may be $19. Because of this, they
reap the advantages of having only the *latest*, newest technology,
while also buying components dropping in price. (Remember Gateway's
write-off of, as I recall, $100 million plus of old component parts
which dropped in price and subsequent resale value about 18 months ago?)
It is the contention of Rick Van DenBerg at Northern Trust, that the
computer industry will *never* again produce the *financial* (stock)
results it did in the last 10 years, and certainly not the incredible
gains from 1995 to 1998, in which the PC tech sector was so profitable.
Basically, the PC industry has made products so *good*, and the pricing
has dropped so severely, that these companies will never offer the
explosive growth they once did at very high margins. Just two years ago,
8 MB of RAM used to cost $100 to $180...today, DRAM is selling at under
$2 from manufacturers with huge excess capacity, compared to demand.
Which is *why* Texas Instruments, who sold their DRAM production with
Acer, (bleeding $120 million of red ink quarterly) to Micron recently,
made a *superb* deal...they got Micron stock *cheap*, beaten down from
low DRAM prices, and while some people criticized this stock deal,
wanting cash, it appears to be, long-term, a better deal.
Because some day in the future, companies like Micron will eventually
buy up the capacity of DRAM production, and the current oversupply
situation (with depressed Aisan markets) will clear itself up...leaving
a handful of survivors in the market, and pricing will rise again to
better levels for the manufacturers of DRAM. DRAM skyrocketed in price
in 1994, when one of only four major DRAM factories burned in Japan; 8
MB chips were over $220. Within a year or so, numerous new DRAM
factories started up, and now there is a glut of oversupply, and cheap
pricing. This will change whan many of the current players get pushed
out...DRAM producers in Aisa, such as in Korea.
It is a situation similar to the early 1980s when an upstart, very small
company took on the world's largest producer of equipment used to
manufacture semi-conductors. The Japanese owned that market, and had
over 80% of the world wide business to foundries like Intel. A small
American company decided to take them on, and within a few years, had
pushed the Japanese out of the business, and the Japanese, who had
refused to upgrade and expand, lost their market share, and the entire
industry. (The failure to build more plants in this industry led to the
current DRAM glut; the Aisans saw the history of semi-conductor
fabrication equipment, in which the Japanese failure to build more
factories cost them their market, and decided they would not lose DRAM
production to the Americans next...so people built factories, running at
losses, to maintain market share. Unfortunately, demand was beginning to
drop.) The American company was Applied Materials, and they now control
64% of the world wide market, although the Aisan problems have severely
hurt their earnings.
One of the "new" (hardly, just little known to many) areas to invest in
is DSP, or "digital signal processing", used in cell phones, pagers,
toasters, cars, etc. Texas Instruments is a leader here, and its stock
is still a buy, even though the next quarter may be a negative (charges
from sales of their DRAM operations may dampen earnings and Wall Street
expectations), they are on the edge of the much higher growth section of
the technology industry.
The paradigm has shifted...PCs are not the leading growth businesses.
What will lead is the *ridiculously* overpriced internet companies, and
newer high tech growth industries like DSP, communications companies
(WorldCom), and companies which will develop new products with newer
technologies, for consumer/business use. You will be buying software off
the Web, with direct downloads...no more boxes...
In other words, when Intel builds a new plant for $5 billion, it is hard
to make money off it, with sub-$1000 computers...
Computers will be profitable, and strong, just not the companies with
100% growth yearly, and margins of 50% plus as they have been
previously.
NOW, after all this, please read this story from the _WSJ_, in today's
(8/21/98) paper, p.A3:
August 21, 1998
Intel to Unveil New Line of Chips To Target 'Budget' PC Market
By DON CLARK and DEAN TAKAHASHI
Staff Reporters of THE WALL STREET JOURNAL
Intel Corp. is finally mounting a credible response to sub-$1,000
personal computers, but the prospect of even cheaper PCs is raising new
fears about prospects for the semiconductor market.
The Santa Clara, Calif., company on Monday will announce a line of
microprocessor chips that represent Intel's best hope for taking back
market share in the fast-growing sub-$1,000 PC segment. Rivals Advanced
Micro Devices Inc., National Semiconductor Corp.'s Cyrix unit and
Integrated Device Technology Inc. exploited Intel's late entry into the
budget-priced PC market, and a low-end chip called Celeron that received
poor reviews. An improved version of that chip, code-named Mendocino, is
expected to cost PC makers $139 to $179, said Ashok Kumar, an analyst at
Piper Jaffray Inc.
That's quite a comedown for a company that usually starts new chip
pricing well above $500, and one whose profit margins have been under
pressure lately. Some analysts now think the pressure will only get
worse.
Thomas Kurlak, who follows chip stocks for Merrill Lynch, Thursday
lowered his long-term rating on Intel to "neutral" from "accumulate,"
predicting that Intel's average selling prices will decline 33% over the
next five years. Mr. Kurlak wrote in a research report that PC prices
could sink as low as $200, suggesting prices as low as $30 for Intel
chips.
The prospect of even more drastic price cutting followed on the heels of
negative earnings news Tuesday from National Semiconductor Corp., LSI
Logic Inc. and Analog Devices Inc., driven in part by continued weakness
in Asian chip markets. Taken together, the developments cast additional
doubt about the timing of any recovery for the struggling industry.
Intel shares Thursday sank $3.5625 to $86 in Nasdaq Stock Market
trading. Texas Instruments Inc., also downgraded by Mr. Kurlak, fell
$1.625 to $58.875 in New York Stock Exchange composite trading. Also on
the Big Board, National Semiconductor declined $2.0625 to $11.5625,
Analog Devices closed down $1.75 at $19.75 and LSI Logic closed at
$15.125, off 68.75 cents.
Not all analysts are so gloomy about the market. For one thing, falling
chip prices don't necessarily translate into lower profit margins,
because semiconductor makers can often lower costs even more quickly
through advances in manufacturing technology. In addition, Intel is
simultaneously announcing lucrative high-end chips that help to balance
out reduced profits on
new low-end products.
"The impact of these low-priced PCs is completely overblown," said Mr.
Kumar of Piper Jaffray.
Intel had no direct comment on Mr. Kurlak's conclusions, and declined to
provide specifics about the new Celeron chips in advance of the Monday
announcement. But a spokesman noted that the company hasn't changed its
guidance to analysts about its profitability. Intel's gross profit
margins slid from 54% in the first quarter to 49% in the second quarter,
but the company still expects the year to finish at an average of 52%.
"Over the long term, it will be 50% plus or minus a few [percentage]
points," the spokesman said.
Still, rock-bottom PC pricing is undeniably changing customers' buying
patterns, and affecting strategies throughout the industry's food chain.
The new Intel Celeron chips, targeted at chips costing around $900,
still aren't suited for newer machines, pushing prices much lower.
Micro Center, a chain of computer stores, has been selling a $500
computer with a Cyrix chip since November. Sun TV & Appliances Inc. and
Fry's Electronics, both with dozens of stores, followed suit in March
with a $499 machine built by Millenium Electronics in Irvine Calif.
PrecisionTec LLC, a manufacturer in Costa Mesa, Calif., Thursday
announced a machine for $399 that uses a chip from Integrated Device
Technology and which it expects to sell over the Internet through
companies that include Egghead.com Inc. (The lowest-price PCs typically
don't include monitors.)
"It's like the VCR," says Troy Barnes, chief executive officer of
Millenium, which sells its $499 machines under the NetRam label. "It's
inevitable that technology is going to come down into the right price
range for all consumers. I'm betting that more retailers are going to
come in line just to keep the other guys from getting all the sales."
Mr. Kurlak, in a research report, estimates that budget-priced PCs now
account for about 27% of the market, and may swell to 60% of the market
in five years. If Intel retains 80% of that business, he calculates, its
gross profit margins are likely to fall to 45%. The company's rivals,
meanwhile, expect to make money at low price points that Intel will be
slow to embrace.
"There is going to be room under Intel's prices," said W.J. "Jerry"
Sanders III, AMD's chief executive officer. "If it's a fully functional
PC, AMD wants that business."
Intel, which is also introducing a high-end version of its Pentium II
line Monday, won't specify how low it is willing to go in pricing, but
says it is determined to follow the market. "At some point, the reality
is you can't make money -- the business isn't sustainable," said Karen
Alter, an Intel marketing manager. "That said, we will not walk way from
a market segment."
----
I *hate* Kurlak of Merrill Lynch, though he is a widely respected tech
analyst, and probably rightfully so, although he has made some rather
large blunders, and is usually very pessimistic. He always *costs* me
money.
DWW II |
