Dell Still Computes, Northrop Has Some Glitches

Stock Exchange gives readers a chance to listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Dell Computer (DELL)

Jim: If you’re looking for one of the most popular, widely traded stocks on the Nasdaq market, you can’t do much better than Dell Computer, right, partner?

Mike: Yes, although to hear all the commentary about Dell lately, you’d think the party’s over.

Jim: Not true, but we’ll get to that in a moment. Dell, of course, is the incredibly fast-growing maker of personal computers that was started by one Michael Dell out of his college dorm room. Said to be a born entrepreneur, Dell pioneered selling PCs to businesses directly--that is, over the phone or the Internet and without stores. It was a masterstroke. I use a Dell here at The Times, by the way, and I have no complaints.

Mike: Neither do I, and I not only have a Dell here, but also at home.

Jim: Dell Computer struck gold because it found a very efficient, low-cost way of moving PCs from its plants to the customer. At the same time, Dell stayed extremely focused on customer satisfaction, almost to the point of obsession.

Mike: Which is evident by Dell’s numbers.

Jim: They’re mind-numbing. Consider this: In 1996, just two years ago really, Dell’s sales were $7.7 billion. In ‘98, they were $18 billion.

Mike: But there’s another Dell number, Jim, that’s one of the most striking numbers I’ve seen as long as I’ve been covering business. You know which one I’m talking about, don’t you?

Jim: Yeah, the stock price.

Mike: Since early 1990, nine years ago, this stock has appreciated 76,000%.

Adjusted for splits along the way, it went from 13 cents a share to more than $100 as of early this year. And it just announced its seventh split in seven years. Which tells you why Michael Dell’s net worth is around $20 billion.

Jim: But the stock’s dropped more than 20% lately, which brings us back to your comment about the party being over.

Mike: The stock is dropping because a lot of people are suddenly worried that Dell’s growth is slowing.

Jim: Which is nonsense. Even if Dell’s growth rate has slowed a tad from its historical rate of some 50% or so, it’s still an exceptionally fast-growing machine, and its stock is still very attractive.

Mike: I agree. The growth has not ended for Dell and, even if it slows, investors have so much confidence in Dell’s management team--and it’s well-placed confidence--that they’ll continue to bid high for Dell’s growth. This company’s performance has always been consistent and almost always outperforms people’s expectations.

Jim: The stock got as high as $110 a share on Feb. 1 and has since dropped to the mid-80s, meaning it still sells for about 55 times its expected ’99 earnings per share.

Mike: That’s about right for a reliable, fast-growing, high-tech outfit like Dell.

Jim: Yep. Now, it’s true that Dell faces growing competition, and that’s why I’m not surprised if its growth has slowed a bit. Compaq Computer, among others, is moving aggressively into the direct-selling business. Dell, in turn, is moving more into the consumer and home-office markets to maintain its growth, and those are markets where Compaq, Hewlett-Packard and others are already knocking heads.

Mike: Right. Dell traditionally has focused on selling to businesses, so it hasn’t loaded its computers with a lot of video game software. But the consumer and home-office markets hold a lot of potential for Dell.

Jim: Here’s what you do: Ignore all the noise about a possible slowdown at Dell and just buy this stock. This is a great company that builds a fine product that’s continually in greater demand. Sure, this stock might not keep skyrocketing as it has throughout the ‘90s, but so what? It’s still going to provide big profits.

Mike: Because the company will keep growing.

Jim: There’s no end in sight. Listen, just the other day the research firm Dataquest published its worldwide data on PC shipments. Guess who had the biggest percentage gain last year? Dell, at 65%. That’s more than twice the gain of the nearest rival.

Mike: I’m with you. You know, people have made emotional darlings out of some of the most preposterously ludicrous companies in the high-tech sector. So you can do a lot worse than getting emotionally involved with a company like Dell.

Northrop Grumman (NOC)

Mike: I get a bit of an emotional tug when it comes to Northrop Grumman.

Jim: You’re not going to get weepy on me here, are you?

Mike: Not much chance of that. But when I was growing up on Long Island in New York, our big hometown employer was Grumman Corp. . . .

Jim: . . . then a big maker of Navy aircraft . . .

Mike: . . . and I vividly remember how the local paper would track the course of Navy contracts coming to Grumman, the contracts Grumman lost and so on, because it made a huge difference in the employment picture on all of Long Island.

Jim: Sort of like Southern California in the early ‘90s.

Mike: Right, and Southern California also learned, to its dismay, that it’s foolish to hitch your wagon to one industrial horse. So just as Long Island’s economy has diversified away from Grumman, so Southern California finally cut its reliance on aerospace.

Jim: But not entirely. The old Northrop bought Grumman in 1994 to create this company, which is still a major defense contractor, headquartered in Century City with lots of plants around Southern California. This company makes the B-2 stealth bomber, complex military surveillance planes, a big portion of the F/A-18 fighter jet . . .

Mike: . . . and don’t forget the fuselages for Boeing’s 747 jumbo jets. Now, speaking of hitching your wagon to the wrong horse, how would you like a major part of your business to be dependent on Boeing’s management?

Jim: Yeah, Boeing is having enormous, well-publicized problems with production bottlenecks. That’s just one reason why Northrop Grumman is having big headaches, too.

Mike: Then there’s been its checkered merger history.

Jim: Beyond the Northrop-Grumman merger itself, this company has never reached the big leagues of weapons contractors, because it didn’t build up during the industry’s merger mania of the mid-’90s the way Boeing, Lockheed Martin and Raytheon did. It tried, but often got outbid.

Mike: Now it survives on the sufferance of the Pentagon, which wants to keep Northrop Grumman alive so that it’s got a counterweight to those other big players. Sort of like the poor relation that’s kept around just for appearances’ sake.

Jim: This was all supposed to change last year, when Northrop Grumman agreed to be acquired by Lockheed Martin. But after Uncle Sam raised all sorts of objections to the deal on antitrust grounds, Lockheed Martin walked away last summer.

Mike: Which was the last time Northrop Grumman’s stock was really healthy.

Jim: Then there’s its financial performance. Thanks in part to the Boeing mess, Northrop Grumman suffered a drop of nearly 50% in its earnings last year on flat sales. Moreover, it’s talking about its sales remaining flat for the next two years at least, at around $9*billion. The result: Its stock has plunged 50% over the last year as well.

Mike: Now, people on the Street seem to think there are brighter days ahead for Northrop Grumman, but nobody thinks that’s going to happen until probably the end of this year or 2000.

Jim: Well, not nobody, Mike. I happen to think that it’s not going to take that long.

Mike: You really are the eternal optimist.

Jim: Hardly. But I’m going out on a limb here and say I’d buy the stock.

Mike: Big mistake.

Jim: Hear me out. Now, it’s true that a year ago the stock got as high as $139 a share when the Lockheed Martin deal was in sight, only to drop to the low 60s today, like a Tomahawk missile falling on Baghdad.

Mike: And all those Northrop Grumman shareholders--do they count as collateral damage?

Jim: Look, you’re always kidding me about not buying at the bottom, but here’s my Exhibit A. I don’t think the stock will go much lower, because all the damage is already in the price. Northrop Grumman is still a top defense contractor with gizmos the Pentagon values. Yes, its earnings will stay under pressure for a while, especially in light of the Boeing situation, but I still think they’re going to start looking good compared with their depressed levels of late. And the stock has a nice dividend yield of 2.6%.

Mike: But you can’t be entirely sure that all the bad news is out. Nobody is sure that its relationship with Boeing won’t get worse. Northrop Grumman might still have to cut back on its Boeing output.

Jim: I agree that Boeing’s forecasts have been worthless over the last year.

Mike: Right, and Northrop Grumman still seems to be operating at a level that’s beyond what Boeing needs.

Jim: How do you know that?

Mike: Because they’re still making fuselages at a faster rate than Boeing is building 747s. Those fuselages are gonna have to go somewhere. But if they end up as Quonset huts in San Pedro, they’re not going to command much of a price.

Jim: There’s something else: This company could still get bought. Like we reported last week, rumors are flying that TRW might be interested in a deal someday. Or Northrop Grumman might buy another defense company so as not to fall too far behind those giants. Plus, there’s an intangible I like here: Northrop Grumman CEO Kent Kresa. I don’t think he wants to be remembered for running a company that simply didn’t get swallowed by Lockheed Martin. He wants better than that.

Mike: Well, I certainly wish him the best and hope he accomplishes all he wants. But frankly, it’s all conjecture that he can pull that off, in the next year or at all.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Era.” Either can also be reached at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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Dell Computer, Monday: $84.88

Northrop Grumman, Monday: $61.63