D-Day for Dell: D is for Downgrade

Dell (NASDAQ:DELL) opened this morning down 7 percent after announcing its quarterly results yesterday. Earnings during the period dropped 18 percent, and missed analysts’ earnings consensus of 52 cents by a penny. The company further stated its revenue would decline an additional 7 percent this quarter. Gross margins also missed estimates, coming in at 27.1 percent.

Following the stock price drop, many analysts have been dropping their ratings. Shaw Wu from Sterne Agee lowered his rating for Dell to “underperform,” which essentially translates to “sell.”  In a note to its clients, Wu noted the company’s core PC business has been suffering from competition from Apple, Acer, and Hewlett-Packard. Wu wrote, “We are concerned with the company’s longer-term fundamental position and may face more difficulty making further operational improvements.”

Citigroup’s Rich Gardner also cut his group’s rating to “hold” and lowered its target price from $20 to $19. Gardner is concerned with Dell’s prospects for making needed improvements. Richard Kugele of New York’s Needham and Co. also downgraded the stock to “hold.”

Wait-and-See Analysts

There are some analysts, however, who are advising a “wait and see” approach to Dell. Brian Marshall of ISI maintained his firm’s rating of “neutral,” believing Dell’s future potential must be viewed in years, not quarters, since the company will have to shift its focus away from personal computing and towards enterprise services, software, and IT. “We believe changing the composition of a $60 billion revenue base is non-trivial…” cautioned Marshall, but he did go on to state, “(We’re) still scratching our heads on how earnings per share grows in 2012. … In the face of flat revenues, declining gross margins and continued operational expense growth, we struggle on how EPS will be up in 2012.” “We like the plan,” he clarified,  “just not the set-up.”

Chris Marshall of Deutsche Bank claims Dell may not be as bad as the numbers indicate. He blamed a general lack of consumer purchases in general, as well as the flooding in Thailand that caused widespread hard drive shortages. Says Marshall, “Shortages hampered the ability to sell richer high-end systems.” He maintained his firm’s “buy” rating.

Here’s how shares of Dell are reacting to the downgrades:

Dell Inc. (NASDAQ:DELL): DELL shares recently traded at $17.13, down $1.08, or 5.93%. They have traded in a 52-week range of $13.29 to $18.36. Volume today was 26,403,900 shares versus a 3-month average volume of 17,233,900 shares. The company’s trailing P/E is 8.79, while trailing earnings are $1.94 per share.

To contact the reporter on this story: Jonathan Morris at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com