Thursday, August 27, 2009

Dell shares up on a "high-quality" earnings beat (DELL)

AlphaNinja - Dell's (DELL) earnings of 28cents per share (including 4 cents per share for cost reduction expenses), beat the consensus estimate of 23cents. The earnings beat was high quality because they actually beat on revenue and gross margin, instead of simply slashing costs.
Gross margin of 18.7% was up 100basis points over last quarter:
-->>"Gross margin was 18.7 percent of revenue as strong improvement in cost of goods sold, disciplined pricing, a sequential increase in sales from enterprise products, and a $69 million buyout of a revenue-sharing agreement by a vendor offset previously highlighted pressure from component costs, competitive pricing and revenue mix in client systems."

Operating cash flow was $1.1billion, and end-of-quarter cash and investments totalled $12.7billion, or 42% of today's market value.

Despite the good results, Dell is not yet ready to call an inflection point, and they see the much-anticipated PC refresh cycle as a 2010 story, disapointing some who were hoping for a back-half of 2009 boost.

As usual, my biggest problem with this company is that they continually cannot make cash from operations in excess of net income - they say it's coming but it's still a ways off.

So for my valuation using FCFY(Free Cash Flow Yield), I go back and update share count and cash balances for the last four quarters. I use a Free Cash Flow number that looks backward and forward, getting to $1.8billion. That's going to be conservative for 2010, but I'm fine with that. As the chart shows below, we get paid to demand a higher yield. When DELL shares fetched less than $9 back in March, the market seemed to forget they had $5 a share in cash, for a net stock price near $3!!!

That pushed the FCFY to over 30% for a few days. I didn't catch the stock there, but did note on May 28th that "The stock is a big-time BUY, and could be a double within the next year."

Back then the FCFY was about 17%, what I considered to be WAY above their cost of capital of 5-6%, as they demonstrated by tapping the debt market.

At this afternoon's price, I get an FCFY of about 11%, and that's before the street gets comfortable with possibly higher Free Cash Flow estimates for this year and next. Still way above their cost of capital so I think the shares will go higher from here:

The earnings presentation, for those interested:
DELLFY10 Q2 Earnings Presentation

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