From the DELL THREAD.... Here is the Barron's article.............
Dell, a Bit Beaten Up, Still is the Champ
By BILL ALPERT
The Greatest PC company took a dive last week. Dell Computer shares closed at $80,
blinking up from the canvas at the spotlights where they'd floated at $110 just weeks before.
They got stung by Tuesday's sales report for the quarter ended January. Revenue growth
was great but slightly less great than Wall Street expected.
"We just missed a beat, " said Chief Financial Officer Tom Meredith on the Tuesday
conference call with analysts. "This is still an art, not a science."
Were this the sweet science of boxing, Dell would be Muhammad Ali for the way the firm
strings together round after round of sales performance that is powerful, nimble and pretty.
Dell stock is up more than tenfold in two years. Michael Dell's name recognition in
Kyrgyzstan trails Ali's by probably just a percentage point. Last week, however, fans of the
Round Rock, Texas, firm worried: Has the competition finally learned Dell's tricks, by
studying its fight films?
For the heavyweight that Dell's become, the January quarter sales growth was awesome.
Revenues rose 38% over the year-earlier period, to reach $5.2 billion and cap off a fiscal
year totaling $18.2 billion. January-quarter earnings were $425 million, and per-share
earnings were 31 cents, a handy 55% above the year-earlier sum. The company declared
its seventh stock split in as many years, paying 2-for-1 on March 5.
While Dell's earnings met, but did not exceed, the expectations of Wall Street, most
analysts had looked for quarterly sales of at least $5.5 billion -- not the $5.2 billion Dell
reported. Year-over-year growth of 38% was awesome, but less awesome than Dell's 65%
pace back in mid-1997. Dell officials said the shortfall in awesomeness resulted from profit
margins that were mistakenly big. The slip-up, said chief executive Michael Dell, took place
back in the third fiscal quarter, ended October. That's when the company was bidding on
large corporate deals that would make January's revenues.
"In the third quarter we were not aggressive enough in our corporate pricing to sustain the
level of growth we expected in the fourth quarter," said Dell, on Tuesday's call. Had the firm
shaved profit margins by a few basis points (or hundredths of a percentage point),
speculated CFO Meredith, then Dell Computer might have pulled in a couple of hundred
million more in revenues. And that would have increased dollar profits and earnings per
share, said Meredith, even with the slimmer margins. Dell's since bid more aggressively,
the executives assured their teleconfreres.
For that, investors clipped $20 billion off Dell's $140 billion stock market value. Dell's trip-up
caught most Wall Street bookies flat-footed. Instead of beating the earnings estimate of
Merrill Lynch's Steven Milunovich, for instance, Dell fell a penny short. "I knew that over
time they were going to shift from 50%-plus growth to 40% growth," says Milunovich. "But it
all happened at once."
Some saw it coming. A week ago Friday, analysts Richard Gardner of Salomon Smith
Barney and Daniel T. Niles of BancBoston Robertson Stephens each warned that Dell's
revenue growth had slowed. Despite the demurrers of other analysts, Nile's comment
knocked Dell shares down 12%, with the confirming earnings release finishing the
combination. Niles says he had no single "Eureka!" but assembled clues from market
research and from listening to IBM, Compaq and Hewlett-Packard, whose quarters end a
month before Dell's. When Niles noticed that Dell did not pass through some Intel price
cuts in the form of lower PC prices, the analyst suspected Dell was preserving profit to
make the targets for the quarter's earnings.
"I've had my share of disasters," admits Niles, "so it was a nice feeling to get this right."
For the moment, says Niles, Dell doesn't have as big an edge as it did. The prices of PC
parts aren't falling as fast as last year, when they were dropping 1% a week. With a week's
worth of sales in inventory, Dell thrives during periods of free-falling parts prices. Dell's big
rivals, by contrast, must lumber along with inventory lags as large as three or four months'
sales, counting inventory in the distribution channel. But lately, those rivals have slimmed
inventories to perhaps a month and a half, and pricing for components is dropping by only
1% a month. Dell's profit margin advantage over its rivals, says Niles, has narrowed from
10%-15% to the range of 3%-5%.
Competitors have tried hard to show they've learned Dell's quicksilver moves. Everyone does
some direct sales nowadays. Compaq claims it's turning PC inventories at an annual rate of
30 times. Even little Micron Electronics in Nampa, Idaho, talks about its inventory turns. A
partly public subsidiary of chipmaker Micron Technology, Micron Electronics is run by Joel
Kocher, who learned the drill as head of Dell sales and marketing until 1994. On $404
million in sales for the fiscal quarter ended December 3, Micron earned $12 million, or 12
cents a share, and turned inventories at an annual rate of 47 times.
Those are cool stats for any manufacturer, but they still trail the 52 inventory turns clocked
by the much-bigger Dell. Like most great strategies, says Merrill's Milunovich, Dell's direct
model looks simple and easy to copy. But a lot happens at training camp that rivals can't
see. That's where the late light-heavyweight champ Archie Moore guarded the secrets of his
"breathology" and ate his aboriginal diet behind a curtain.
Dell's been at it 15 years, says Milunovich, and remains purely focused on PC direct sales,
unlike diversified rivals IBM and Hewlett-Packard. Even at 40% annual sales growth and
slightly lower margins, says the Merrill analyst, Dell could earn $1.45 for the current
January 2000 fiscal year. Dell merits a 45-times multiple on his $2 estimate for fiscal
January 2001, he thinks, for a current stock value of $92 a share. (These per-share numbers
will be halved, of course, when adjusted for Dell's coming split.)
Company officials say their supremacy shows in their continuing market-share gains.
Gateway, Dell's South Dakota rival in the direct-sales business, grew its December quarter
revenues all of 17% over the year-earlier level. Dell claims its own comparable segment
grew 56%. In the fourth calendar quarter of 1998, says Michael Dell, his firm grew 3.6 times
faster than the overall PC market, with the Dell notebook segment growing 4.2 times faster
than its peers. Dell also grew 3.2 times faster than Compaq.
Meredith, the Dell CFO, ain't apologizing about January : "We just flat out kicked butt and
gained a lot of share."
On last week's conference call, Dell reported winning more than half of all January-quarter
corporate bids -- the best win rate in perhaps a year. Dell customers remain highly
satisfied. "We have a long-standing relationship built on performance," says Mike Cawthon,
director of field services for Entergy, the New Orleans electric utility, where Dell's the
preferred choice for 16,000 desktops. "Our interface with them remains a very strong
relationship."
But Wall Street's a venue that tries to quantify its admiration, and Dell investors have cooled
from worship to mere adulation. A fine measure of Dell's performance is return on invested
capital -- the measure watched by everyone inside Dell from Michael on down to the
paper-clip counter. This figure, which shows profits as a percent of the firm's productive
assets, has proven for years how hard and fast Dell punches for its weight class. But the
number has slipped steadily lower over the last year, from a world-beating 229% for the
April '98 quarter, to the merely sensational 170% for the January '99 quarter. That's still one
of the great numbers in the history of manufacturing, and Dell spokesman T.R. Reid notes
the January quarter figure would have been 190%, not 170%, except for an adjustment of
prepaid taxes on Dell's balance sheet. Compaq's recent best was 39%.
"Is this the best PC sales company that ever existed?" asks Niles of BancBoston
Robertson Stephens. "Yes." A better question, says Niles, is whether Dell's growth rate
has permanently slowed, because the rate of growth is directly tied to the multiple that
investors will pay for a stock. The Dell stock premium will be smaller if it's growing at 3.6
times the market instead of five times. With his estimate for Dell's January 2001 fiscal year
at $1.80 a share, Niles is cautious even at share prices in the low 80s.
Dell has plenty of opportunities to reclaim acclaim. Sales outside the Americas and Europe
are still just 6% of Dell's total. About 37% of its sales mix comes from notebooks and the
beefy systems called servers; Dell aims to push sales of those high-profit products to 50%
of its total mix. At an April meeting with analysts, management will expound on the
advantages the Internet affords a direct seller like Dell. The 'Net already brings Dell billions
of dollars in annual orders, costing not a dollar in sales commissions.
Company spokesman Reid knows Dell's followers seek a sign. "Folks are looking for
evidence that the model still has fundamental advantages and can still outperform the
industry," he says. "But there is a trail of naysaying about its ability to do that, stretching
back quite some distance." If Dell missed a beat, he says, it remains a world beater. |
