Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

DELL Falls on Positive Earnings But High Price to Book Ratio

Companies / Tech Stocks Dec 01, 2007 - 09:36 AM GMT

By: Brady_Willett

Companies Best Financial Markets Analysis ArticleDELL reported positive results after the bell yesterday, with quarterly earnings and revenues rising by 27.5% and 8.5% respectively compared to last year. However, with per share earnings missing analyst estimates and operating margins sliding to 5.29% (from 6.1% in 2Q08), shares traded sharply lower after hours.

While DELL may or may not be able to keep its turnaround/restructuring story alive, it is becoming increasingly obvious that the supergrowth days of the late 1990s are gone. Moreover, given that DELL's share price continues to be obscenely priced compared to book, it is also clear that shareholders still see something in DELL that I am missing.  Is it really worth paying $63 billion for something that is worth $6.8 billion on paper?


The DELL Story

Being perfectly positioned to benefit from the trend of computers becoming a common home appliance, DELL's stock price soared as the company consistently reported strong increases in revenues, earnings, and shareholders equity in the 1990s.  However, as the PC industry matured and the U.S. stock market mania ended, DELL's stock price crashed: at yesterday's close DELL shares were still down more than 50% from their 1999 highs.

Whether you care to look at DELL's spectacular revenues, earnings, margins, or book value record, the story is much the same: the unbelievable returns generated in the late 1990s were the aberration while the last 7-years are likely to be closer to the norm.  As a quick example, DELL averaged 54% in annualized revenue growth in the 1990s with no single year coming in below 20%, but the last time the company increased annual revenues by 20% was 7-years ago.

In recent years declining business returns have compelled the company to alter its direct business model and focus on entering retail and potentially higher growth areas of the world (i.e. China).  From a book value perspective these efforts have yielded recent results, albeit not as strong as those achieved during the late 1990s.

Recent successes aside, the continued uncertainty that comes with DELL's evolving business model is hardly priced into the stock. Rather, in the early 1990s investors paid a couple times book to own DELL shares and today they pay almost 10-times book. Does a much larger and less attractive growth/return story really warrant a significantly higher P/B premium?

The optimist could argue that if DELL simply used 50% of free cash to pay a dividend the company could have returned 65 cents to shareholders in dividends over the last four quarters (this would imply a 2.3% yield on the stock, which is above the average yield on the S&P 500). But what the optimist should remember is that the DELL's fortunes can change quickly and a dividend may not be sustainable. Recall that the company went from having nearly $3 billion in working capital to a negative working capital position in only seven quarters (ending Jan 31, 2003). 

Moreover, the optimist should remember that while the company's share repurchase program was recently stopped ($27+ billion has been wasted in repurchases since fiscal 1999), taking the place of repurchases has been acquisitions.  Stock repurchases can juice earnings by reducing share count and/or keeping employee costs off of the income statement (if you are into the EPS game this may be important to you), while the outcome from acquisitions is considerably less certain. 

Since May 1, 1998 DELL has generated $34.4 billion in free cash flow while during the same time the company added only $5.4 billion to shareholders' equity. Translation: for every dollar in free cash generated approximately 16 cents in shareholder wealth (net equity) is created.  As analysts play the meaningless EPS game and slumping DELL shares near a seemingly attractive price/free cash flow multiple, be aware that exactly how and when shareholders are going to be rewarded from what looks like a successful turnaround at DELL remains a mystery...

In short, that the dividendless DELL ‘model' always generates a lot of cash means very little unless ‘a lot' can somehow be translated into shareholder returns. By contrast, that DELL trades at ridiculously high P/B level could mean another demolition in the company's share price if DELL's remodeling efforts do not progress smoothly.

“When we talk about creating value for our shareholders, cash generation for us is the ultimate litmus test”.   DELL CEO, Don Carty. November 29, 2007

Disclosure: No one at FallStreet.com has any investment position in DELL.

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

Brady Willett Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in