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Dell Looks Cheap

by: Valuecruncher October 07, 2008 | about stocks: DELL    

Valuecruncher

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Since late August, Dell (DELL) has been hammered.  The share price has dropped from $25.63 on August 27 to $15.25 on Friday – a 40% drop in just over five-weeks.  In that five-week period DELL did suffer a disappointing profit report, cautioned of global slumping demand and saw significant turmoil on global financial markets.  The turmoil in the financial markets has seen technology stocks hit hard – including DELL.  But a 40% drop in five-weeks is substantial.  Is it time to start buying DELL?  We decided to have a look with the Valuecruncher interactive tool: Valuecruncher valuation model of DELL with interactive assumptions.

Valuecruncher produces a valuation of $19.24 for DELL.  This is a current valuation, not a target price.  This valuation is 26.2% above the current share price of $15.25.

Assumptions

Our assumptions are revenues of $65.0 billion in 2009 growing to $70.0 billion in 2011. We have used a flat EBITDA margin of 6.5% to 2010 and then 7% in 2011. Our terminal growth rate is 3.0%. We used a terminal capital expenditure number of $800 million. Our WACC (discount rate) is 12.0%.  All of these assumptions can be amended in the Valuecruncher online valuation model to adjust the valuation.  Our analysis incorporates the cash and debt on the DELL balance sheet – Valuecruncher calculates a net debt number.

We believe that our assumptions are reasonably conservative.  The near-term revenues and profitability are very achievable.  The terminal growth rate is about the US economic long-term growth rate.  The discount rate of 12% is reasonably high reflecting the uncertainty around DELL.

Based on our analysis and assumptions, the current share price looks cheap.  The intrinsic value of DELL looks well above the current share price.

Disclosure: None

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This article has 7 comments:

  •  
    Oct 07 11:02 AM
    "I'd shut it down and give the money back to the shareholders"
    Reply
  •  
    Oct 07 11:46 AM
    A lot of things look cheap! And they may get cheaper! When the going is tough, go with the best of breed--HP.
    Reply
  •  
    Oct 07 12:13 PM
    Consider if you had purchased Dell shares 10 years ago you would have made zero, negative if you factor in the time value of money. And as eps has remained flat for that period 10x earnings is probably about right.
    Reply
  •  
    Oct 07 08:16 PM
    Using DCF or other valuation metrics assumes value is being added to a company AND it will continue to operate and produce cash flows in the future. Above all, it assumes earnings belong to shareholders. The problem is tech companies like Intel, MSFT, Dell and CSCO are run for the benefit of insiders. Nearly ALL the cash flow is taken out by issuing stock options and buybacks. Meanwhile, there is no guaranteed future as industries change. Acer enters at low end, HP dominates retail (AND hurting DELL's internet sales cost advantage) and Apple owns high end. So DCF analysis is meaningless as tech companies may have no moat or survival value. Shareholders did not get any cash when going is good and get none when they go belly up or 'consolidate' on change. Tech companies think they deserve high PEs and that shareholders are idiots. Buffet while Bill Gate's friend never invested in Microsoft. Over 10 years DELL's top management has taken out billions of dollars out of shareholder's pocket. Cisco junior engineers live in million dollar houses 'because we need to compensate our talented employees'. Guess what - the only investing strategy is to do what the insiders do, do PTO - position trading only - buy when stock is low (and company is doing buybacks to support it) and sell when company issues shares or insiders are selling crazily.

    Another thing about tech companies - most analysts are lying whores! How do you think they make money nowadays? Not by 'selling' research reports - but rather by sharing profits from giving heads up to in-house propreitary traders.

    Be further wary about OLD TECH if the management that made them great or the advantages are long gone!
    Reply
  •  
    Oct 07 10:50 PM
    Jain, You hit the nail on the head. Tech is a sucker's bet. Even the highly touted products are mostly junk. Buy a solid drug company or railroad any day. Even a bank!
    Reply
  •  
    Oct 08 01:09 AM
    Ummm, when has Dell NOT been cheap in the past few years. Even when the PC market was absolutely booming last year, Dell was reporting one lousy quarter after another.

    And now that the economy's slowing, we're supposed to get interested in this stock. I'm sorry, your easy-to-manipulate-to-... DCF model is absolutely useless.
    Reply
  •  
    Oct 08 01:03 PM
    if your not buying at $10/sh, what about $5/day. These guys still run lean. and in a slowing market they should adjust the fastest.
    Reply
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