BUY - DELL
We anticipate that Dell will on Thursday (18 February) release accounts that will show signs of improvement. Our positive view is mainly based on anticipations that Dell will in the 2010 calendar year benefit from a rising willingness to buy among corporate customers and a positive effect from Windows 7.
What is the reason behind this optimism?
The reason is simply that the tone of Dell's management has become more positive and that Dell has several times during the quarter (in connection with the release of the Q3 accounts and subsequently at the investor conference) indicated that it sees a rising willingness to buy among corporate customers. Although we believe that the improvement is still only moderate/fragile (a view that may turn out conservative), it is very positive for Dell that corporate customers’ willingness to buy is thawing out, as the company generates approx. 75% of its sales from this segment. To this should be added that the sale of PCs for private consumers was also very strong in Q4 (which was supported by the accounts from Microsoft and Intel) - a demand that was driven particularly by Windows 7.
We consider the development in the gross margin a joker in the quarterly accounts. The development depends very much of how aggressive Dell has wanted to defend or increase its global market share. Behind our estimates we still have a gross margin at 17.5% and we therefore anticipate that Dell has become slightly more aggressive. It should also be noted that we assume a tax rate at 28% against consensus at 26%. If we adjust our estimate to 26%, this will lift eps by 1 cent to usd 0.29 (against consensus at usd 0.26).
We maintain our buy recommendation for Dell with a price target of USD19
Generally, we expect that a combination of stronger willingness to buy among corporate customers and the fact that Windows 7 will mature will make Dell’s sale to corporate customers gradually increase. Hence, H2 2010 should also be better than H1 2010.
Fundamentally, Dell is a company that moves in the right direction. Before and during the global slowdown Dell has strengthened its competitive power. The operating costs have been adjusted significantly and due, among other things, to the acquisition of Perot Systems, a company that offers information technology and system integration, Dell is about to position itself as an attractive supplier of simple/small complex IT solutions. These solutions will help Dell increase its operating margin.
We expect that Dell will use its strong balance sheets (and cash flow) to pursue medium-sized acquisition targets (usd 1-4bn) and the primary focus is on acquisitions, which can relatively fast be scaled in its global organization (e.g. the Equal Logic acquisition in 2008 has more than tripled sales in less than two years).
Finally, we believe that the current price level underestimates Dell’s assets.The price target for Dell is usd 19, which is 30% above the closing level on 29 December 2009.
Happy Yielding!
We anticipate that Dell will on Thursday (18 February) release accounts that will show signs of improvement. Our positive view is mainly based on anticipations that Dell will in the 2010 calendar year benefit from a rising willingness to buy among corporate customers and a positive effect from Windows 7.
What is the reason behind this optimism?
The reason is simply that the tone of Dell's management has become more positive and that Dell has several times during the quarter (in connection with the release of the Q3 accounts and subsequently at the investor conference) indicated that it sees a rising willingness to buy among corporate customers. Although we believe that the improvement is still only moderate/fragile (a view that may turn out conservative), it is very positive for Dell that corporate customers’ willingness to buy is thawing out, as the company generates approx. 75% of its sales from this segment. To this should be added that the sale of PCs for private consumers was also very strong in Q4 (which was supported by the accounts from Microsoft and Intel) - a demand that was driven particularly by Windows 7.
We consider the development in the gross margin a joker in the quarterly accounts. The development depends very much of how aggressive Dell has wanted to defend or increase its global market share. Behind our estimates we still have a gross margin at 17.5% and we therefore anticipate that Dell has become slightly more aggressive. It should also be noted that we assume a tax rate at 28% against consensus at 26%. If we adjust our estimate to 26%, this will lift eps by 1 cent to usd 0.29 (against consensus at usd 0.26).
We maintain our buy recommendation for Dell with a price target of USD19
Generally, we expect that a combination of stronger willingness to buy among corporate customers and the fact that Windows 7 will mature will make Dell’s sale to corporate customers gradually increase. Hence, H2 2010 should also be better than H1 2010.
Fundamentally, Dell is a company that moves in the right direction. Before and during the global slowdown Dell has strengthened its competitive power. The operating costs have been adjusted significantly and due, among other things, to the acquisition of Perot Systems, a company that offers information technology and system integration, Dell is about to position itself as an attractive supplier of simple/small complex IT solutions. These solutions will help Dell increase its operating margin.
We expect that Dell will use its strong balance sheets (and cash flow) to pursue medium-sized acquisition targets (usd 1-4bn) and the primary focus is on acquisitions, which can relatively fast be scaled in its global organization (e.g. the Equal Logic acquisition in 2008 has more than tripled sales in less than two years).
Finally, we believe that the current price level underestimates Dell’s assets.The price target for Dell is usd 19, which is 30% above the closing level on 29 December 2009.
Happy Yielding!
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