Novice Investing - Delighted To Invest in Dell

Date: Tuesday 16th 2010f March 2010 12:48:05 PM

Delighted To Invest in Dell - 05/27/2009

By: Hari Wibowo

Dell Inc.
One Dell Way
Round Rock, TX 78682
United States

Looking at Dell Inc. (DELL) trading at $ 24 per share in 2007, we wrote that Dell would be a good investment candidate when it reached $ 18.68 per share. This accounts for the expected $ 1.39 per share of earning in 2008 and Dell's positive net cash of $ 5.45 per share. Fast forward in 2009, Dell shares had fallen to as low as $ 8.00 per share and it earned $ 1.35 per share in the trailing twelve months ending on Jan 2009. For current fiscal year ending on Jan 2010, analysts expect $ 1.04 per share. Meanwhile, Dell shares is currently trading at $ 11 per share, significantly below $ 18.68 per share. How about balance sheet? Dell is still going strong, spotting positive net cash of $ 9.5 Billion or $ 4.87 per share as of January 2009.

What is Dell's fair value in this case? Assuming a yield of 7%, implies a fair Price Earning ratio of 14.28. With expected $ 1.04 per share of profit, Dell's fair value is therefore: 14.28 x $ 1.04 + $ 4.87 = $ 19.72 per share. Current price of $ 11 per share gives us more than 50% potential price appreciation if we invest in Dell.

However, we have to dig further for Dell's business fundamental going forward. Can they continue to earn $ 1.04 per share in the foreseeable future? A glance at Dell's annual report shows that the biggest revenue contributor is Mobility with 31%. (See table below). This is mainly notebook segment and mobile workstations. Unit pricing for this segment fall 14% year over year.

Segment	% Revenue
Mobility	31 %
Desktop PC	29 %
Software and Peripherals	17 %
Servers Networking	10 %
Services	9 %
Storage	4 %

The second biggest segment is Desktop PC which experiences - 4% unit growth and - 12% unit pricing. While unit pricing fall less than mobility, this is due to the fact that average selling price has reached a very low point and is less likely to drop further.

We can cover the rest of the segments but the largest two segments represent 60% of Dell's revenue. This revenue is in jeopardy to be reduced mainly due to the saturated market. Meanwhile, the rest of the segments that experiences growth such as software, are not Dell's competitive advantage. Dell's prowess is in its efficient manufacturing technique which gives it an admirably lean inventory.

In the short run, Dell might not be able to earn more than $ 1.04 per share. Even with cost cutting effort, one should conservatively forecast Dell to get less than $ 0.90 per share. Recent trend such as the switch to mobile phone for PC substitution reinforces that notion.

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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