Novice Investing - All Is Not Dull At Dell

Date: Tuesday 07th 2008f October 2008 01:53:20 AM

All Is Not Dull At Dell - 07/21/2006

By: Novice Investing Staff

We just covered Dell Inc. (DELL) annual report a few days back. We said that Dell needs to prove that it can grow earning once again before share price can bounce back. Today, Dell proved that it can't do that just yet. On Friday, 21st July 2006, Dell Inc. announced that its second profit will fall to between 21 to 23 cents per share versus analysts' expectation of 32 cents. This surely is a big miss. Given that Dell had lowered its earning expectation from 37 cents per share just last May, this news certainly dent Dell's credibility.

We know what Dell does, roughly. During the 1990s and the early half of the decade, Dell was the most efficient producer of Personal Computers. It can offer customers the best deal in personal computer due to two sole reasons. One is its lean efficient manufacturing, stocking inventory just enough for several days of supply. As cost of component generally decreases with time, having lean inventory is a competitive advantage. For example, if you stock three months worth of inventory, that same inventory will be worth much less when you ship your Personal computer to retailer. The second is that Dell sells direct. This means that it does not have to share its profit with retailers, leaving it with a higher profit margin.

Dell's stellar balance sheet also needs to be considered. In the latest fiscal year, it holds 'only' $ 576 Million of inventory. With annual sales of $ 55.9 Billion in revenue, Dell is holding 3.76 days worth of inventory. Contrast that with competitors Hewlett-Packard Co. (HPQ) who had an annual sales of 86.9 Billion and $ 6.87 Billion, or roughly 28.5 days worth of inventory. Dell is also better at cash conversion. It holds only $ 5.45 Billion worth of receivable versus $ 21.0 Billion for Hewlett-Packard.

Nowadays, Dell is struggling to produce a profit growth. Several guesses came to mind. One, Dell is less efficient that its competitors. This is unlikely. As you can see, Dell has a better profit margin, better cash conversion and better inventory management. Furthermore, Dell has lower selling general and administrative expense than its closest competitors, Hewlett Packard. Two, Competitors are offering better products than Dell. That might be true. If Dell is more efficient in anything it does, it struggled

nowadays due to unappealing product mix. As people integrate PC into their everyday's life, their needs grow. They are not only concerned about price but more towards feature as well. This happens as consumers can get more feature with lesser amount of money. If this is the case, then what Dell needs to do is to offer a higher featured PC where it can earn more incremental profit per unit.

As we have said a few times, Dell needs to prove that it can grow earnings. We are not sure what causes the inconsistency of profit at Dell. (We just gave two possible causes above). However, Dell is still the leader in term of efficiency and balance sheet strength. Therefore, valuation is what matters here. If Dell's stock price is quite low to warrant the negative trend in earning, then you should have Dell in your portfolio.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Dell Inc. (DELL) or any other securities.

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