Friday, February 19, 2010

Reactions to Dell's quarter (DELL)

Dell - an AlphaNinja favorite for quite some time - is down 6.7% today, after reporting upside to earnings but terrible gross margins.

My initial reaction was horror, as Dell beat earnings estimates by 1 PENNY despite beating revenue by one BILLION dollars. Later last night I summed up why I think the stock is still a screaming deal.

It's worth looking at what others are saying today.

  • Deutsche Bank - They note strong top line (revenue) results, but said margins remain an issue. They note that net of cash, the stock trades at 7x their earnings estimates. Their price target is reduced to $20 from $22, which is still 47% higher than current levels.
  • Kaufman noted that Dell surprised on the revenue upside, but couldn't turn that into profits. They're quite concerned with the lack of operating leverage even with the revenue upside. They note that component pricing took a huge toll, and thinks Dell will have to make more acquisitions in the storage, server and networking space.
  • Credit Suisse - They said that Dell's inability to raise margins raises "strategic concerns." They also are not happy that Dell seems happy enough with it's current lack of upside operating leverage. They increased this year's estimate for revenue, and decreased earnings per share estimates. They lowered their price target to $12.50, from $14.

All three firms bring up important arguments, as I tried to do also in last night's earnings analysis. The point remains though, that Dell's Free Cash Flow Yield is far too high. Even those who don't like the stock have earnings estimates above my conservative numbers. Using Credit Suisse's (who says don't buy the stock) estimates for Free Cash Flow of 3.2, 3.6, and 3.2 billion in 2010-2012, the company's Free Cash Flow Yield (after pulling out balance sheet cash) is 20%, 22%, and 21%, respectively.

Dell doesn't deserve a PE of 15 or a Free Cash Flow Yield of 7%. But they sure do not need to yield 4times as much as it costs them to borrow for ten years, which is 4.7%.

Copyright 2010 AlphaNinja

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