Well, you're not supposed to "defend" your investments. If anything, understand the argument on the other side of your trade, and see if you still like it.
Dell reported earnings last night, and today the stock is down 6%. The thing is, earnings came in better than expected. Last quarter, they beat sales estimates by a billion dollars, but EPS was only in line with expectations.
The biggest disappointment with the recent quarter was the gross margin, which came in at 17.6%. Many people had been looking for higher, especially considering that the mix of revenue shifted towards (what we thought was!) higher-margin non-consumer sales. Didn't happen. Dell stated that component pricing was tight, leading to a weak gross margin. Several analysts on the call probed the company, as they didn't buy the argument that the supply chain was the only reason for the weak gross margin.
On the conference call, management tried to redirect focus towards "operating dollars." Fine. Grand. But there is less and less operating margin to be found from cost cutting. The balance sheet is obscene (in a good way!), and I can only hope the company deploys cash expeditiously on acquisitions (with the return on cash being zero, note that I don't even care what acquisition it is....).
On to the positives. The company has actually figured out a way to manage its working capital! It can be seen in the improvement in free cash flow below.
Those doing the math should take note of today's free-fall in the share price, as it's a good time to buy. The company's Free Cash Flow Yield (FCFY) is somewhere between 16% and 22%, depending on which year you use. That is literally 16times Dell's cost of capital, based on trading in its 2year debt! The difference between Free Cash Flow a year ago and Free Cash Flow now, is that the company is more consistently able to keep working capital needs from impeding free cash flow generation.
I continue to like this stock, an example of a "good company at a great price."
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