Dell’s Earnings
Dell reported earnings yesterday afternoon and the stock promptly dropped 10% after hours. Obviously, investors did not like what they heard.
Dell reported earnings a penny shy of estimates and revenues that slightly beat forecast. With revenues higher and earnings lower, they obviously reported lower margins. Operating income, as a percent of revenue, declined quarter over quarter from 6.1% to 5.3%.
The cash conversion cycle, a measure of how quickly Dell is paid by their customers versus how quick they pay their suppliers dropped from 38 days to 35 days. In addition, management was not overly optimistic about the future, saying that they have seen some minor changes in purchasing by some financial firms, but overall, they have not seen a change in orders from the economic woes.
Despite all of these worrisome trends, the selling was overdone. As everyone knows, Dell has been pushing into the retail space. Selling through retail should reduce margins and hurt the cash conversion cycle. And management had a history of overpromising and stretching (sometimes illegally) to meet their guidance.
After the selling Dell had a market cap of $56 billion. They have $14.8 billion is cash and investments on their balance sheet. This leaves just over $40 billion in value attributable to the business. On the cash flow side, Dell reported free cash flow (after stripping out interest payments) of roughly $750-800 million last quarter. At this rate, Dell’s operations are selling for only 13 times cash flow.
This is extremely cheap given Dell’s huge return on capital. (Their return on capital has trended lower to 32%, in part due to a huge increase in cash on Dell’s balance sheet.)
Despite short term trends that may be negatively impacted by product mix, Dell is a huge value right now. Dell has ridiculous returns on capital and can be bought for only 13 times cash flow.
