Despite Surge, Dell Shares Still Have Room To Rise
June 17 2009 - 8:30AM
Dow Jones News
Dell Inc. (DELL) shares have jumped 62% since bottoming out in
February as the company slashes costs and indicates it is looking
for an acquisition. Despite the big rise, there's likely more to
come.
Beginning last year, the Round Rock, Texas-based company has
aggressively corralled its expenses, closing several facilities and
laying off more than 8,000 employees and is trying to cut $4
billion from its costs by the end of fiscal 2011.
At the same time, Dell is looking for ways it can bolt on
growth. Recently, it raised money and hired a
mergers-and-acquisition executive. Already, Dell has begun scouting
possible targets, according to a person familiar with the
situation.
The twin strategies, along with evidence suggesting the computer
business that is Dell's bread and butter is stabilizing, have sent
the company's shares hurtling higher. If Dell continues chopping
costs and finds an acquisition that brings it new products,
analysts are optimistic its shares can continue their surge. Over
the past three weeks, a dozen analysts have raised their price
targets for Dell shares.
"While the macro and business environment remain tough, Dell
should benefit from stable demand," said First Global Research
analyst Devina Mehra, who recently upgraded Dell to moderate
outperform.
Dell declined to comment for this story.
Since touching a 52-week low of $7.84 on Feb. 20, Dell shares
have surged amid a steady stream of news from the company
indicating it was taking drastic action. On Tuesday, Dell shares
closed down 0.8% to $12.77.
While the shares of many technology companies have risen
recently, Dell has been a pacesetter. Over the last three months,
Dell shares have risen more than 36%, outpacing Hewlett-Packard
Co.'s (HPQ) 27% jump and the Nasdaq's 29% rise.
Dell's cost-cutting is a major factor behind the enthusiasm.
Goldman Sachs analyst David Bailey, who has a $14 price target,
estimates the cost savings mean Dell is getting between three and
five cents per share in net earnings for every $500 million in
revenue. Last year, Dell posted revenue of $61.1 billion.
Analysts are also excited by the prospects of Dell buying a
company. Since 2008, Dell has raised $3 billion, partly for
acquisitions, and has a war chest of $9 billion on hand.
Some analysts see the company looking at a Citrix Systems Inc.
(CTXS) or Red Hat Inc. (RHT), software and services companies that
would fill a crucial hole in Dell's line-up of offerings. Others,
such as Collins Stewart's Ashok Kumar, sees Dell trying to break
into the smartphone by looking at Palm Inc. (PALM), a company that
he says is affordable.
"Dell can afford to expend about a third of its gross cash, or
$3 billion, on an all cash transaction," noted Kumar, who has a
$13.27 target for Dell. "Palm falls well under this threshold."
Of course, Dell's rapid jump means its shares are now pricier
than some of its competitors'. The company's forward
price-to-earnings ratio, a key metric for comparing the relative
cost of stocks, has recently been higher than Hewlett-Packard's and
International Business Machines Corp.'s (IBM).
There is no guarantee Dell will be able to continue delivering
the cost-cutting that has helped propel its shares. Nor is it
assured the company will be able to conduct smoothly a big
acquisition, an area in which Dell has little experience.
But analysts say Dell has another development working in its
favor: A recovery in the computer market.
Last year was terrible for the computer industry, which posted
its first-ever year-on-year sales decline. Lately, however, there
have been signs of a turnaround.
In mid-April, chip giant Intel Corp. (INTC) said the computer
industry had bottomed out in the first quarter. Other technology
companies, including Cisco Systems Inc. (CSCO), later chimed in
with similar sentiments and two industry trackers have reported
better-than-expected sales.
That likely will accelerate next year as companies that have put
off upgrades can no longer do so. Given estimates that nearly
two-thirds of Dell's revenue comes from corporate clients, the
company is in a position to benefit.
-By Ben Charny; Dow Jones Newswires; 415-765-8230;
ben.charny@dowjones.com