Is Dell a Buy Despite Potential for Going Private?

 
on February 20 2013 2:21 PM
Michael Dell
Dell founder and CEO Michael Dell displays a Dell tablet computer during his keynote address at a conference in San Francisco Reuters

With shares of Dell Inc. (NASDAQ:DELL) trading at around $13.81, 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

Dell just reported Q4 net income of $530 million, or 30 cents per share. Profit was down 31 percent year over year. Q4 revenue came in at $14.3 billion versus an expectation of $14.2 billion. There was no guidance, which is due to the fact that the company is likely to go private.

The PC business isn’t as strong as it used to be, but PCs will be around for a long time as they’re the best option for working environments. Even if laptops take over in that regard, Dell will still benefit. Unfortunately for Dell, laptop sales were down 2.5 percent for the quarter. The good news is that the server business was up 18 percent year over year. Dell is slowly moving toward selling services to corporations, which will lead to higher margins. However, this doesn’t mean Dell will give up on PCs, laptops, and tablets. Management is wise enough to make good decisions based on industry trends, profitability, and long-term potential.

At the current time, Dell has decent margins, a ton of cash flow, and it’s trading at only nine times earnings, and at eight times forward earnings. In most cases, this would look like a good value play, but since the company is likely to go private, there isn’t much place for the stock to go.

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

E = Equity to Debt Ratio Is Normal             

The debt-to-equity ratio for Dell is normal. The balance sheet is in positive territory. Operating cash flow is $3.86 billion.

Dell Dell  http://wallstcheatsheet.com

T = Technicals on the Stock Chart Are Mixed      

Dell has performed poorly over a one-year time frame, but year-to-date has been exceptional. Dell has outperformed Hewlett-Packard Company (NYSE:HPQ) and the S&P 500 year-to-date. Dell currently yields 2.30 percent. Hewlett-Packard yields 3.10 percent.

Dell Dell  http://wallstcheatsheet.com

At $13.81, Dell is currently trading above all its averages.     

50-Day SMA

11.93

100-Day SMA

10.76

200-Day SMA

11.56

 

E = Earnings Have Been Inconsistent               

Dell has a habit of delivering profits, which is great, but EPS growth has been inconsistent through the years. Revenue had been improving on an annual basis until recently.

Dell Dell  http://wallstcheatsheet.com

When we look at the last quarter on a year-over-year basis, we see a decline in earnings and revenue.

Dell Dell  http://wallstcheatsheet.com

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

As we all know, the PC market is weak, and this will continue. This will likely also be the case for laptops. However, both PCs and laptops will remain a part of our lives, and Dell will continue to benefit from it. That said, Dell has been wise to expand into other areas. 

Conclusion

Dell is a solid company that might surprise people down the road. However, due to the likelihood of Dell going private, the stock’s upside potential is extremely limited. Unless you’re a day trader, Dell is a WAIT AND SEE.

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