Is Dell Stock Undervalued?

With shares of Dell (NASDAQ:DELL) trading around $12, 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:

T = Trends for a Stock’s Movement

Dell is a global information technology company that offers its customers a range of solutions and services, which are delivered directly by Dell, as well as other distribution channels. The company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Dell serves a wide range of customers: global and national corporate businesses; educational institutions; government, health care, and law enforcement agencies; small and medium-sized businesses; as well as end users. Through its four segments, Dell is able to provide information technology products to a growing user base around the world.

Dell may not have given up on the buyout bid from founder Michael Dell just yet. Yesterday, the computer maker’s special committee voted down Michael Dell’s sweetened $13.75 per share offer because of a voting provision in the bid that would stop absent votes from being counted as votes against the deal. However, the committee said it would move the date of the vote back to September if the company got rid of the provision, which would grant Michael Dell more time to get previously absent Dell investors to vote for the deal.

T = Technicals on the Stock Chart are Mixed

Dell stock has been struggling over the last several years. The stock is now coasting lower as buyout rumors continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Dell is trading between its key averages that signal neutral price action in the near-term.

DELL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dell options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dell Options

47.82%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put option contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings, revenue growth rates, and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Dell’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dell look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-80.56%

-29.00%

-44.90%

-12.50%

Revenue Growth (Y-O-Y)

-2.41%

-10.71%

-10.70%

-7.50%

Earnings Reaction

-0.22%

0.21%

-7.32%

-5.34%

Dell has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have not been too happy with Dell’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Dell stock done relative to its peers, Apple (NASDAQ:AAPL), HP (NYSE:HPQ), IBM (NYSE:IBM), and sector?

Dell

Apple

HP

IBM

Sector

Year-to-Date Return

26.97%

-14.40%

84.28%

2.27%

16.02%

Dell has been a relative performance leader year-to-date.

Conclusion

Dell is a provider of technology products and services to consumers and companies worldwide. Buyout negotiations continue, which has produced a stagnant stock in the last several months. Over the last four quarters, earnings and revenue figures have been declining, which have not pleased investors. Relative to its peers and sector, Dell has been a year-to-date performance leader. WAIT AND SEE what Dell does this coming quarter.

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