I am glad the market in general has been giving such a doom and gloom view on Dell. Its stock price halved from $40 to $20 just 3 years ago. I think it’s great because it simply gives me the opportunity to buy into a good, if not great, company like Dell.
The Problem(s)
It’s true that Dell has not been competitive in the past few years with HP eating much of its pie. Their products were not attractive. Customer service actually sucks. Consequently, fast sales growth came to a screeching stop.
Dell Solution
Since the departure of Michael Dell and his coming back not so long ago…and of course, with a couple of key employees leaving. Things have changed. Significant things have changed indeed. Since this January, its Direct Model that has been the key growth driver has now been shifted to the retail model like other PC manufacturers. Additionally, Dell introduced new models that are more appealing to the masses.
The Results
It looks like the entire market is mispricing Dell despite all the good news I see. This keeps pushing it down further as it misses more expectations. Just like how the whole market misjudged the oil stocks just a few months back and allowed me to get in and profit from buying them at unbelieable prices.
I don’t know if Dell is a screaming buy. But at these prices, I would definitely accumulate more over time to build up position.
Dell’s turnaround strategy is working
Even with US PC shipments growing at only 3 % last year, only Apple and Dell show double-digit improvements. Dell saw its U.S. market share grow by 15% to 31%. April figures from IDC and Gartner are showing growth of about 20% for the first quarter because of its retail channel initiative from its outdated direct model and a series of product revamps to bring back appeal to the masses. If I am not mistaken, some of its newly introduced laptops are running out of stock!
“Strength in Weakness” factor is one of the key factors I look for. For a company that is able to outcompete others in a dificult enviroment is a sign of core strength. Sure Apple is doing well but I would not buy it at these valuation prices.
With global PC sales continue to be very strong both in Asia-Pacific and Latin America where both regions are growing at 19% last quarter, Dell is sure to benefit from this as more than 45% of its total sales come from outside of the U.S.
Other factors I look for that I think is good signal for long term growth is their strong stock repurchase program. In Q4 of 2008, Dell spent $4 billion to repurchase 179 million shares of common stock and intends to spend at least $1 billion to repurchase its shares in the first quarter of fiscal 2009. That’s about 10% of total outstanding shares. The outstanding shares have declined from 2.6 billion in 2005 to about 2.0 billion today. That’s down by 23% in over just 3 years. With the company generating at least 3.5 Billion in free cash flow, I don’t see why this program will not continue over the next few years.
Valuations
Although Dell is priced at about 15x EPS, it’s at the lowest levels not seen in ten years, I suspect that there is more room to go. But again, my take on this is, we never know if the stock will go further down. So it’s not a bad bet to put some in Dell today. If it goes lower, pick up some.
All the gears are starting to move in its direction.