Dell margins and consistency in focus

Dell, the world's No. 2 personal computer maker, is aiming to be a bigger player in data center equipment and the red-hot mobile market, but the bulk of its revenue still comes from low-margin PCs, a situation the company is trying hard to rectify. It faces formidable competition in International Business Machines Corp and Hewlett-Packard Co.

Dell's turnaround effort has been a bumpy one, and analysts say it needs to show consistency to give investors a compelling reason to buy its stock. Dell reports February 15.

Dell has a tremendous opportunity but we need a clearer path on how the company plans to transition, said Gleacher & Co analyst Brian Marshall, who has a neutral rating on the company.

Marshall is looking for a sustainable change in profitability, and for Dell to explain how it can boost its gross margin above 20 percent.

Last quarter, Dell surprised Wall Street as earnings and margins blew past expectations, and the company raised its yearly forecast.

For a graphic comparing Dell and its rivals, click here: http://link.reuters.com/zuf97r

MARGINS ARE THE THING

Investors remain wary on Dell, worried that it is wedded to low-cost commodity PCs that are a drag on margins and offer little chance of significant growth.

For its fiscal fourth quarter, Dell is expected to earn 37 cents a share on revenue of $15.7 billion, according to Thomson Reuters I/B/E/S. That would represent EPS growth of 32 percent, on 6 percent revenue growth.

Dell's shares often trade off its gross margin performance, which has been extremely choppy. The company has missed Wall Street's margin target for six of the past eight quarters.

Analysts, on average, are predicting a margin of 18.5 percent for the fourth quarter.

Dell's shares continue to underperform the broader market. The company's stock is flat from a year ago, versus a roughly 30 percent gain in the Nasdaq.

Chief Executive Michael Dell has made it clear he is willing to spend from the company's $14 billion cash pile to buy the pieces it needs to diversify and boost margins, with a particular interest in software and storage.

The company has also made plenty of noise in the mobile market of late, launching tablets and smartphones, but they have received a lukewarm reception.

Dell trades at near 10 times forward earnings, a bit better than rival HP, but a lower valuation than IBM.

According to an analysis by Thomson Reuters StarMine, Dell's shares are undervalued, carrying an intrinsic value of $18.80 a share, well above their current level of $13.98.

(Reporting by Gabriel Madway, editing by Matthew Lewis)