Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

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

© 2005-2019 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