Is Dell a Dud?

With shares of Dell Inc. (NASDAQ:DELL) trading at around $13.40, is Dell an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The PC industry is in constant decline, revenues have been declining, and earnings have been inconsistent. As of right now, shareholders are set to receive $13.65 per share in cash by the second quarter of 2014 thanks to an LBO. Dell’s board is attempting to finalize the deal, but shareholder greed is getting in the way. Considering the circumstances, it might be wise for them to take the money and run.

Q1 results for Dell weren’t impressive. Non-GAAP EPS came in at $0.21 on $14.1 billion in revenue. Both were declines on a year-over-year basis. Enterprise Solutions Group revenue increased 10 percent, and Dell Services revenue increased 2 percent. However, Dell Software suffered an operating loss, and End User Computing revenue declined 9 percent. Gross margin declined to 19.5 percent from 21.3 percent for the same quarter one year ago. Costs and competition have increased. For those looking for good news, Dell yields 2.40 percent. Sorry, but there isn’t much more good news to report.

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The chart below compared fundamentals for Dell and Hewlett-Packard Company (NYSE:HPQ).

Trailing P/E 12.69 N/A
Forward P/E 8.29 5.89
Profit Margin 3.30% -10.86%
ROE 18.56% -41.00%
Operating Cash Flow 3.38B 11.94B
Dividend Yield 2.40% 2.50%
Short Position 1.70% 3.20%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Dell has performed well year-to-date, but it has underperformed the market for years.

1 Month Year-To-Date 1 Year 3 Year
DELL 0.04% 32.93% -7.09% -8.57%
HPQ 8.38% 49.71% 1.73% -52.35%

At $13.40, Dell is trading below its 50-day SMA, but above its 200-day SMA.

50-Day SMA 13.66
200-Day SMA 12.37

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Dell is close to the industry average of 0.70.

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Debt-To-Equity Cash Long-Term Debt
DELL 0.67 10.90B 7.25B
HPQ 1.21 12.63B 28.25B

E = Earnings Have Been Inconsistent

Earnings have traveled across rolling hills over the past several years. Revenue performance has been even more concerning.

Fiscal Year 2009 2010 2011 2012 2013
Revenue ($) in millions 61,101 52,902 61,494 62,071 56,940
Diluted EPS ($) 1.25 0.73 1.35 1.88 1.35

As stated earlier, Q1 EPS came in at $0.21 on $14.1 billion in revenue. Below is a look at the four previous quarters.

Quarter Apr. 30, 2012 Jul. 31, 2012 Oct. 31, 2012 Jan. 31, 2013
Revenue ($) in millions 14,422 14,483 13,721 14,314
Diluted EPS ($) 0.36 0.42 0.27 0.30

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

PCs and laptops are in decline, and Europe is still very weak. On a global scale, there is an enormous disconnect between what’s taking place in equity markets and what’s taking place in the real economy. In other words, the consumer isn’t as strong as advertised.

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Dell has been a well-run company for many years, but there isn’t much reason for optimism at the moment. Dell’s goal is to become a leading global provider of services to enterprises. The following is a related quote from Brian Gladden, Dell CFO:

“We made progress in building our enterprise solutions capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions. In addition, we have taken actions to improve our competitive position in key areas of the business, especially in end-user computing, and it has affected profitability. We’ll also continue to make important investments to support our strategy and drive long-term profitability.”

Is there potential for Dell? Yes. But right now, downside risks outweigh upside potential.

Dell is a STAY AWAY.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.