Novice Investing - Dialling Dell for Investment

Date: Tuesday 13th 2008f May 2008 07:25:48 AM

Dialling Dell for Investment - 12/4/2007

By: Hari Wibowo

We last talked about Dell Inc. (DELL) back in November 2006. At the time, Dell reported third quarter 2006 earning that beats expectation but unfortunately refuse to give guidance going forward. Despite of that, shares rallied 9% to $ 27 per share. Fast forward today, Dell shares is back in the $ 24 range after reporting disappointing guidance for 4th quarter 2007 and beyond.

Some of the main reasons include: slower than expected workforce reduction. Early in the year, analysts expect Dell to reduce headcount by 10% and it only achieves 2.5% headcount reduction as of August 2007. Also, gross margin of Dell was 18.5% while expectation is running at 19%. Finally, Dell announced that it will be running more expenses as it restructures. This can be viewed as a positive signal, however, as Dell will sacrifice short term profit for long term health of the company.

Dell is definitely a turnaround candidate. Since founder Michael Dell took over, it has yet to show significant improvement over its financial result. We just hope your patience will pay off. With lean inventory management, Dell can manage a $ 57 Billion revenue company with only 4 days worth of inventory, which is incredible. That alone had given Dell leverage to compete with other manufacturers. Further, flushed with $ 12.2 Billion in positive net cash ($ 5.45 per share), Dell is in not in danger of going into bankruptcy. Heck, it is not even predicted to loss any money. Instead, expectation for fiscal year ending in January 2008 is for a profit per share of $ 1.39.

Now, we have said it last year and we'll say it again. While Dell is a solid company in a turnaround mode, current share price of $ 24 per share does not give us enough appreciation to invest in Dell. What would be a good price to buy Dell? At current situation, a purchase price of $ 18.68 would give us a 50% potential appreciation from Dell. How do we know that? You can look at the raw concept of fair value here.

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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 Starbucks Corp. (SBUX) or any other securities.

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