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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Dr. David Gleitman who wrote (126583)	5/19/1999 8:30:00 AM
From: Philip W. Dunton, Jr	Respond to of 176387

From H&Q * Hambrecht & Quist Hambrecht & Quist Hambrecht & Quist ** Company: Dell Computer Price: 43 Recommendation: Market Perform Notes: f Date: 5/18/99 DELL's Q1EPS Hits The Mark; Some Fundamentals Improve; Some Issues Remain. Summary - Dell's Q1 results showed improved sales momentum, accelerated enterprise sales growth, Internet-driven SG&A leverage, and evidence of successful transitioning to the industry's new business model. However,the company is transitioning to a slower growth model and the valuation is not compelling at current levels. 1999 A 2000 E 2001 E Q1 EPS $.11 $0.16A $NA Q2 EPS 0.12 0.17 NA Q3 EPS 0.14 0.19 NA Q4 EPS 0.15 0.21 NA FY EPS 0.53 0.73 0.97 FY REVS (M) 18,242 25,237 34,000 CY EPS 0.53 0.73 0.97 CY P/E 81.6 59.3 44.6 FY Ends Jan Current Price $43 1/4 52-Week Range $19-55 Market Cap(M) $989.003 Shares Out(M) 2,738 Secular Growth 32% C2000 P/E-to-SecGr 1.9 C2001 P/E-to-SecGr 1.4 SUMMARY AND INVESTMENT VIEWPOINT. Dell reported solid first quarter earnings of $0.16 versus $0.11 (up 45%), in-line with our estimate, with signs of improvement on a number of fronts. Notable in this regard is the improved sales momentum, the acceleration in the growth of enterprise systems, the continued success in driving e-commerce business and scaling operating expenses more efficiently by leveraging the Internet. However, the results did not show the upside to sales and EPS that some analysts had predicted in the days leading up to the report which drove the stock up in advance. Also, comments made by management on the conference call have caused us (and we believe others will do the same) to trim our Q2 EPS forecast slightly to consensus levels. Moreover, we believe the results also show that the company is in the progress of transitioning to a new business model with the longer term EPS growth rate coming down to a level closer to 35%-40% and with less upside potential in the near future. On a favorable note, the first quarter results demonstrate to us that last quarter was somewhat of a bump in the road and not the beginning of a weaker trend and that the company's sales momentum has returned, albeit at projected lower growth rates. Also, we believe a couple of things are now in the company's favor relative to fundamental trends within the company and in the industry. Maybe most notable is the continued success that Dell has in growing its Internet Web assisted sales (now 30% of its sales) and being able to leverage certain cost and efficiency benefits in its operating cost structure. Thus, we believe that at a time when certain competitors are beginning to nip at the company's heels from a competitive stance, Dell is in the process of taking its business model to the next level by using the Internet to maintain its competitive advantage relative to its cost structure and its account control. Finally, we view the widely reported operational and management problems at industry leader Compaq Computer (CPQ - $26 - MARKET PERFORM) as a positive for Dell. We believe that Compaq has more work to do in its financial re-engineering program, that there can be further disruptions ahead relative to its distribution channel strategy and that it may take some time for a new CEO to implement some new initiatives. This gives Dell more breathing room to transition its business model and continue to win market share. From a valuation perspective we do not believe that the current share price provides an overly attractive entry point for new investors from a risk/reward perspective. We would prefer to look for a lower entry point when the underlying EPS growth is fully discounted in the share price. With potential upside of about $50 possible in the shares, based on a P/E to EPS ratio of about 1.4x our fiscal 2001 estimate of $0.97, we would look for a entry point in the high $30's. Thus, we maintain our MARKET PERFORM rating on the shares at this time.