Dell’s Demise?

Dell Computer (DELL) stock has a special place in my heart. It was my single greatest stock purchase, and very well could remain that way for the rest of my life. I bought shares in January 1996 for 94 cents each (split adjusted) after the stock got hammered as the company stumbled with its notebook computer line. Dell peaked at $60 as the Nasdaq passed 5,000 in early 2000.

Why do I bring this up now? I haven’t owned the stock in years, but I am now taking a look at it again. Pricing pressures have compressed margins and sent shares down to $24 each. Dell has elected not to use Advanced Micro Devices’ (AMD) chips in its boxes, and as a result, they have had a hard time competing with those suppliers that do diversify away from Intel’s (INTC) more expensive offerings.

I am not saying that Dell stock is poised for the late-1990’s-like ascent. Those days have long passed. However, Dell now trades at a discount to IBM (IBM) and I think that makes little sense. Dell has $5 in net cash per share on its balance sheet, taking its enterprise value down to $19 per share. That’s a trailing P/E ratio of merely 12.

Is Dell going back to $60 anytime soon? Not a chance. However, for those looking for cheap large cap values in technology, the current valuation the market is assigning Dell implies extreme pessimism about the company’s future. The January 2008 $20 call options look especially attractive at $7 each.

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2 Thoughts on “Dell’s Demise?

  1. NO DooDahs on May 16, 2006 at 9:49 AM said:

    I haven’t looked terribly deeply at it – it doesn’t strike me as a value. The valuations of DELL aren’t compelling when compared to HPQ or GTW, and the valuations of the sector aren’t deeply discounted enough to attract me, either.

    Have you seen that Wal-Mart is gonna start selling build your own computers? Not a good sign for a discount computer maker like DELL.

    I wouldn’t be surprised to see it hit the 22 mark. Typically these things keep falling for a while after the value crowd first starts buying them.

    Also still in shock from seeing you reference a trailing P/E as a valuation indicator – considering we went back and forth about forward and trailing P/E on a thread almost a year ago …

  2. Chad Brand on May 16, 2006 at 10:12 AM said:

    Dell selling at a discount to IBM and HP/Compaq strikes me as interesting given their superior business model, margins, and growth rate.

    The use of trailing p/e was relevant here because it makes the case even more compelling for those of us that use forward p/e’s to value stocks. A 12x forward p/e would look cheap to me, and therefore, a trailing 12x multiple looks even more striking. Just wait until we head into the backhalf of the year and I start using 2007 estimates for my p/e ratios!!!

    The company is growing at a healthy clip and they would clearly help put the current issues behind them if they went with AMD as a supplier. Windows Vista issues will also abate as we head into 2007.

    In general, I am not a fan of tech right now, simply because I am not finding many values. However, large cap is a good, conservative way to play an overbought market that has been led by small caps, and I don’t think the Dell model is dead by any means.

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