Dell Computer's Share Price Decline Tests Faithful Investors
Round Rock, Texas, May 29 (Bloomberg) -- Vince Geracitano, a businessman from Montreal, made what he thought was a sure bet on the stock market in January -- Dell Computer Corp.
The No. 1 direct seller of personal computers was the best- performing stock in the Standard & Poor's 500 Index for the three years ended in December. Investors who bought Dell in 1995 have watched the shares gain 30-fold after five stock splits and sales growth that topped 50 percent a quarter for the past few years.
Since Geracitano bought his 2,000 shares, though, the stock has plunged more than 35 percent. Sales growth for the past two quarters dropped below past levels and price cutting reduced Dell's profit margins. Geracitano, who bought the stock on margin, was forced to sell beginning in February. To cover his losses, he had to put two houses up for sale.
''I've lost everything,'' Geracitano said.
Geracitano may have been better off buying an Internet company. Even with recent declines, America Online Inc., the No. 1 online service, has gained 50 percent this year; eBay Inc., the top auction house on the Web, has more than doubled.
Many investors say they still believe Dell has the best strategy of all the PC makers. With PC prices falling, though, even the best strategy may not pay off as well as in the past.
''Dell will always be the best-run PC company, but the PC business isn't where you want to be right now,'' said Paul Meeks, a fund manager at Merrill Lynch & Co., who manages $1.42 billion and has about 1 percent of his assets in Dell shares.
Testing Resolve
Even some of the diehards who aren't giving up say the decline in Dell shares has tested their resolve.
''I'm not happy with what's been going on,'' said Bill Kautz, a musician in Parkland, Florida, who invests full-time.
Still, Kautz predicts the stock will rebound. He bought his first Dell shares in 1995 and said he's learned not be scared off by analysts' predictions that the company's growth will slow.
Like many small investors, Kautz said his faith in Dell hasn't wavered. The stock's strong performance in recent years has spawned a cult-like following. Investors tout the stock with bumper stickers and T-shirts that say ''Never, Ever Sell Dell,'' and celebrate quarterly earnings with outdoor barbecues.
For most of the 1990s, Dell, based in Round Rock, Texas, near Austin, could do no wrong by investors. Sales increased more than 50 percent a quarter for most of 1997 and 1998.
The company gobbled up market share at the expense of rivals such as Compaq Computer Corp., which was struggling with its system of selling PCs through retailers and distributors.
Getting Shocked
Then, the so-called Dellionaires got a shock. Sales rose just 38 percent in the fiscal-fourth quarter ended in January as rivals undercut Dell's prices to win sales.
Though shareholders of other multibillion-dollar companies would relish such growth, it wasn't enough to keep Dell's soaring stock aloft. The shares fell 8.1 percent the day after the earnings report. They've tumbled 23 percent since.
Even with the decline, Dell shares trade at 47 times expected earnings, compared with 21 for Compaq. Friday, Dell shares fell 1/16 to 34 7/16.
Skeptical investors say they worry that Dell no longer has an advantage in selling PCs over the phone and on the Internet because Compaq and Hewlett-Packard Co. now do mimic Dell. Direct selling lets computer companies keep more of the profits themselves, cutting out distributors.
Moreover, Dell's cheapest PC sells for about $1,000, while upstarts sell theirs for less than $500. Dell says it has no interest in the low-end PC market, where profits are slim or nonexistent.
Dell supporters say they're frustrated by Wall Street's fickleness. In the fourth quarter, analysts were upset by slowing sales, so Dell said it would narrow margins to boost revenue. It did that in the latest quarter, only to be criticized by analysts and investors for declining margins.
Such issues remain, said Philip Treick, a fund manager for Transamerica Corp., which holds 13.8 million Dell shares. Treick said he would buy more Dell if it didn't already make up 5 percent of his Transamerica Premier Equity Fund.
''If I were initiating positions in the PC industry, it would be hands down the obvious choice,'' he said.
Past Stumbles
To be sure, Dell has made mistakes in the past, and it's bounced back from bigger problems than having sales growth slow to 38 percent for one quarter.
In 1989, the company bought memory chips as fast as it could to keep PCs rolling out of the factory. It bought too many. Making matters worse, prices for the parts tumbled, wiping out much of the value of the hoard. Dell had to sell the inventory at a loss, which cut earnings to just a penny a share in one quarter.
After that, Dell learned how to manage inventory, and is now renowned for moving parts in and out of the factory faster than anyone else in the business.
Small investors who bought Dell for less than $1 a share say every drop in the share is just another opportunity to buy.
''I've lived through this so many times before, and I've taken advantage of dips like this,'' said Drew Swiss, vice president of finance for a large medical center in New York.
Swiss just bought several thousand more Dell shares, including 150 for an unborn son who's due in July. His wife is a Dell holder, too, buying ''five splits ago'' at the equivalent of less than 50 cents a share.
''The family owns Dell,'' Swiss said.
|
