‘Price War’ Does Not Compute at Dell (Yet)
Dell Computer Corp. is the personal computer industry’s Great Exception. Brutal price wars have damaged all its rivals, but Dell’s sales, profit and stock price have risen spectacularly and relentlessly since 1995.
There was more of the same on Tuesday, as Round Rock, Texas-based Dell reported results for its fiscal first quarter ended May 3: Sales leaped 52% to $3.9 billion. Earnings surged 54% to $305 million, and per-share diluted earnings were up 63% to 44 cents.
The results again beat analysts’ expectations, this time by 2 cents a share. Dell stock inched up 9 cents to $94.59 before the report was issued, after markets closed.
What’s more, Dell’s profit margin--operating income as a percentage of sales--rose to 10.9% in the quarter from 10.7% a year ago, suggesting Dell continues to dodge the effects of the raging PC war.
CEO Michael Dell said as much Tuesday. “Their [competitors’] problems have not translated into problems for us,” he told Reuters.
Dell stock, up 2,662% over the last three years, now is priced at about 60 times the most recent four quarters’ earnings per share. That is on par with Microsoft Corp.’s price-to-earnings ratio.
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Yet unlike Microsoft and Intel Corp., no one accuses Dell of cultivating a monopoly. What sets the company apart is its rather unglamorous business model.
As a direct-to-customer PC seller, Dell carries virtually no inventory and has no sales channel to worry about. It builds to order, allowing customers to configure their own machines. It enjoys cost efficiencies by using leading-edge parts and turning them over immediately, and price advantages from targeting the corporate, rather than consumer, market.
Dell doesn’t even have a PC line selling for less than $1,000--the hot but low-profit market its rivals have had no choice but to chase.
But as PC price wars spread more pain among manufacturers--and even mighty Compaq and Hewlett-Packard are laid low--how much longer can Dell stay above the fray?
At least six to nine months, says analyst Louis Mazzucchelli of brokerage Gerard Klauer Mattison, who is maintaining his “buy” rating on the stock. That might not sound like a long time, but it’s an eon in the tech business.
“Dell has open-field running room,” said Mazzucchelli. “Its competitors are not necessarily all they could be. The way I look at it, Hewlett-Packard, IBM and Compaq are all in the boxing ring hitting each other over the head. But Dell is outside the ring escaping the blows because of its business model.”
Still, not every computer analyst on Wall Street is a Dell bull. Among the 30-odd analysts who follow the stock, 12 rate it “hold” or lower, according to Zacks Investment Research.
The principal downside scenario for Dell has its accounts--even those that depend on the company’s high-end business PCs to run complex software--gradually defecting to bargain brands.
Indeed, Scott Miller, analyst with Dataquest in San Jose, notes that Dell’s rivals in the boxing ring are about to achieve huge efficiency gains by slashing costs to better compete, while further improvements in the finely tuned Dell model can only be incremental.
Is Dell stock worth 60 times earnings? That’s more than twice the P/E ratio of the average blue-chip stock. But then, the average blue-chip company isn’t expected to post earnings growth of 30% next year, as Dell is.
Mazzucchelli noted that P/E-sensitive investors have avoided the stock for years, and left huge profits on the table. However, even he believes that ultimately the high price of the stock and the falling price of PCs will catch up with Dell. “It’s a question of when. Two or three years ago, you could buy Dell and go to sleep,” Mazzucchelli said. “Today you buy Dell and you have to stay awake.”
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Above The Fray ... Way Above
Dell Computer has managed to stay above the turmoil in the personal computer business, consistently posting tremendous sales and earnings gains. Its stock has risen exponentially. Monthly closes and latest on Nasdaq:
Dell, At A Glance
Annualized sales rate: $16 billion
Est. 1998 EPS*: $1.87
Est. 1999 EPS*: $2.44
Shares outstanding: 652 million
Market cap.: $62 billion
Tuesday close: $94.59
*Analysts’ mean estimate of earnings per share, per Zacks Investment Research
Source: Bloomberg News
