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Thinking of Picking Up Dell Cheap? Don't


There are at least two factors contributing to the company's modest numbers.

Dell (DELL) got whacked on Friday by nearly 7% and rightly so given the results reported Thursday night. But there will be some investors who will look at the valuation -- 0.33x EV/Sales plus $3.90 in net cash -- and think this is a great opportunity to pick up a premium brand at a bargain-basement price. And you'd be wrong.

Nearly two and one-half years ago, Dell laid out its new strategy that was going to return the company to prominence in the computing arena. What they defined at the time were five big growth opportunities to "create long-term value -- consumer, emerging economies, notebooks, SMB, and enterprise."

The global consumer business, in particular, was highlighted as a "massive growth opportunity" over the next five years. Michael Dell noted that, "We are the leader in brand consideration in the United States, France, Germany, and the UK. We are very competitive in India, China and Japan, and we are rapidly growing in Russia." The company had just initiated a push into retail stores with the intent on getting consumers eyeballs and finger tips on Dell products. They expected to be in 10,000 stores by the end of fiscal year 2008. That figure was up to 24,000 by the end of fiscal 2009 and 56,000 as of the just completed year.

So how are these efforts working out for Dell? Not all that well apparently.

Take a look at the graph below and you see the results of the retail push that started in late fiscal year '08. We have no way to separate the consumer business done on a direct basis from that through retailers but if 56,000 storefronts were grabbing a market segment previously missed, these figures would be much stronger. Even with the recession, they should have been tapping a customer base that was additive.

Note: In fiscal year '09, Dell redefined its reporting segments and included Global Consumer. In fiscal year 2010 it reclassified some of its small/medium business revenues as Global Consumer. Using the fiscal year '09 figures under both definitions, I estimated fiscal year '08 revenues under the new definition.

I think there are two factors contributing to these relatively modest numbers. One surfaced in August 2008 on the Q2/F09 conference call. Despite earlier claims of brand leadership in various European countries, Dell acknowledged on the conference call that "…we have a really, really small consumer business [in Europe]. Consumer is growing quite fast in Europe and we're not participating in it. We chose to prioritize Asia and the United States." Whoops!

The second issue is what they're up against in Asia, in consumer and commercial. Lenovo derives about two-thirds of its revenue from China and emerging markets. In its most recent report its Board of Directors was quite pleased with its results and market share gains. This is a company that's willing to operate on a far thinner margin than Dell in order to achieve its objectives as you can see in the table below.

Acer is far less dominant in Asia but its margin structure simply adds to the competitive pressure on Dell. While the company hasn't reported detailed results for 2009, it did announce that its top-line increased 5% for the year (i.e. it gained market share).

Dell's management was harassed on the recent call about margins. While it's true that memory prices have increased as have those for LCDs, they've gone up for everybody. And from the looks of things they're not going down any time soon.

Dell is stuck between a rock and a hard place. The competition is as strong as it's ever been; companies are willing to operate successfully on lower levels of profit; and they're business models appears to be far more acceptable to their investors. None of that's going to change.

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No positions in stocks mentioned.
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