Dell Driven to Diversify
Dell Computer Corp. founder and Chief Executive Michael Dell hopes to do for server computers and storage devices what he did for personal computers: deliver fast, squeeze costs, keep prices low and hope rivals can’t keep up.
He hasn’t scored yet.
Compaq Computer Corp., from which Dell grabbed the PC sales lead, replied by taking Dell’s top ranking in North American server shipments in the last quarter. Success in storage sales also has eluded Dell.
“They’re trying to figure out how to sell in that area,” said Sunil Reddy, a money manager at Fifth Third Bancorp, which owned 155,000 Dell shares as of June. “They’ve tried to make an effort, but haven’t been successful.”
Dell needs a hit with more profitable storage devices and servers, which help run networks, because aggressive price cuts have wrung most of the profits from PCs. Investors aren’t happy that although Dell is shipping more PCs, each one earns less, and they want the computer maker to find a way to boost sales.
The company earlier this month reported a 36% decline in third-quarter profit as sales fell 9.6%, hurt by a slump in corporate purchases and PC price cuts meant to stoke demand.
Dell’s sales, particularly of storage devices and business PCs, need to rise for investors to continue to support owning the stock above $30 a share, said Dennis McKechnie, a money manager for the New York-based Pimco Innovation fund , which owns 1.8 million Dell shares.
Compaq surpassed Dell in the third quarter as the leader in servers shipped in North America. Compaq had 24% of the market, compared with Dell’s 23%, market researcher Gartner Dataquest said.
Dell agreed last month to resell for five years products from EMC Corp., the biggest maker of data storage systems, and introduced three lines of storage servers of its own design last week.
“Profits can grow quite a bit in storage,” Dell said Oct. 31. “We have tons of customers who have been warning us to have a broader storage portfolio.” Through a spokesman, Dell declined to be interviewed for this report.
After falling 11% in the fiscal third quarter, Dell shares have gained 22% since Sept. 10, the day before the terrorist attacks in the U.S. The Standard & Poor’s 500, which includes Dell, has risen 4.5% on that basis.
“I’ve taken some of the profits because it’s a nice run” since Sept. 11, McKechnie said. “We run into some valuation issues with the stock in mid-to high $20s. It’s not obscenely priced, but it’s not as cheap as it was at $17.”
On Wednesday, Dell shares fell 44 cents to close at $25.95 on Nasdaq.
Michael Dell was paid $2.6 million in salary and bonus and was granted 1.25 million stock options last year. He owns 310 million shares, or 12%, of the company he founded, according to a May filing. His stake is valued at about $8.5 billion.
The company’s fiscal second-quarter loss was its first since 1993. Some investors favor the shares because the company has higher profit after one-time costs than Compaq, which hasn’t made money in two quarters, and Gateway Inc., which has had losses for four straight quarters. Dell is seen as the most likely to outperform rivals in a slumping economy.
“This environment is really good for Dell,” McKechnie said. “The clear-cut winner is Dell” among companies that should excel in tougher economic times, he said. “They did benefit in the last 90 days.”
Compaq’s PC unit shipments in the third quarter fell by 31% to 3.2 million, while Dell’s increased 10.8% to 4.2 million, marketing firm Gartner Inc. said. Dell now has 13.8% of PC sales; Compaq, 10.4%.
“Considering the conditions, Dell is doing exceptionally well,” Reddy said. “Within the PC industry, that’s our favorite company. They’ve got the best business model.”
Dell said Oct. 24 that the company won about $270 million in sales after Hewlett-Packard announced its intended acquisition of Compaq because customers wondered which product lines would be retained.
“You have an enormous opportunity for Dell over the next 18 months to capitalize on the confusion that’s out there,” Michael Dell said Oct. 31.
Dell’s sales picked up after the Sept. 11 attacks partially because the company shipped units to businesses and people whose equipment was destroyed.
The company is known for keeping inventories low, yet the U.S. terrorist attacks and a typhoon in Taiwan didn’t disrupt production last quarter. Taiwan-based suppliers store parts near Dell’s factories, and the company made sure supplies were waiting at airports when U.S. airspace reopened after the attacks.
Analysts expect Dell to report sales of $7.75 billion for the fiscal fourth quarter, down 11% from the year-earlier period, according to the average estimate of analysts polled by Thomson Financial/First Call.
Dell hasn’t given a fourth-quarter profit estimate. The average estimate from analysts is 16 cents a share, according to First Call.
