By Benjamin Pimentel
Dell Inc.'s (DELL) shares headed south Wednesday on results that
raised doubts about the company's ability to consistently grow
profits while chasing higher-margin businesses.
But Dell's report also suggests that the hard-disk drive
shortage that has hurt the personal computer market may not be as
severe as many feared. One analyst said that bodes well for
Hewlett-Packard Co. (HPQ), which is scheduled to post its results
after the closing bell Wednesday.
Dell shares were last trading down about 5.8% to $17.15. H-P
shares were down about 1.1% to $29.02.
Late Tuesday, Dell reported results for the quarter ended Feb. 3
that slightly missed Wall Street's earnings estimate. The company
also put out a revenue outlook that fell below expectations.
Dell's results pointed to problems that H-P also faces,
including a struggling U.S. public sector market and soft consumer
demand. But the hard-disk drive shortage did not have as big an
effect as many had speculated.
"Dell beat PC revenue expectations, meaning they were able to
purchase all the hard disk drives they needed," ISI Group analyst
Brian Marshall said in an e-mail. "I think H-P's guidance assumed
they wouldn't be able to purchase all the drives they would need
for the quarter. I think they were able to purchase them."
However, Bernstein Research analyst Toni Sacconaghi said it was
unclear "how much of its hard disk drive issues were company
specific."
He wrote in a note to clients that PC makers Acer Inc. (2353.TW)
and Lenovo Group Ltd. (LNVGY) passed on higher hard disk drive
costs to customers, noting that both of those companies also gained
share from "white box," or unbranded, PCs.
"Our field checks suggest that H-P responded very differently
than Dell to hard disk drive supply issues by raising prices on
transactional sales and discontinuing low-end products, which
appears to have translated into notable share loss," he added.
Dell did say that the company didn't get enough supply of
higher-end capacity drives limiting its ability to make and sell
higher-end PCs. That is a problem for a company that has been
trying to push deeper into higher-margin segments markets by
de-emphasizing lower margin businesses.
Those efforts have paid off, as Dell's improved profit margins
have won praise on Wall Street, where the stock had jumped roughly
24% since the first of the year before Tuesday's report.
Dell's report quickly sparked a debate on what it means for the
company's push for greater profitability.
"That's all folks," Needham analyst Richard Kugele quipped in a
note, as he downgraded the stock to hold from buy. "It's been an
impressive run year-to-date for Dell, rising over 24% and
surpassing our $17 target as the fundamental improvements in its
business mix were gradually recognized by investors."
But Kugele said he sees the shares limited in the $16-$20 range
near term "as headwinds from the hard-disk drive shortage,
lingering weakness in federal/state & local/US consumer
spending, and continued pruning of the revenue mix combine to limit
top-line growth and bottom-line leverage over the forecast
period."
Citigroup analyst Richard Gardner also cut his rating to neutral
from buy, arguing in a note, "In general, the easy margin expansion
related to PC supply chain re-engineering is behind the company,
suggesting more volatility in operating margins and earnings going
forward."
Bernstein's Sacconaghi also wrote that the company "provided a
somewhat incomplete explanation for the shortfall on its earnings
call, but we believe the majority was attributable to hard disk
drives and that Dell was caught off guard by its hard disk drive
mix in the quarter."
But he also noted that the company's "cash flow continues to be
very strong, the stock's valuation is compelling, and the company
continues to effect a positive mix shift in its business."
J.P. Morgan analyst Mark Moskowitz also offered an upbeat view,
citing Dell's effort to expand its higher-margin businesses.
"We believe that there is 3-6 months of revenue pruning before
the stage is set for growth," Moskowitz wrote. "Plus, current
demand challenges in the public sector are not helping. We
recommend that long-term investors take advantage of any pullback
in the stock."
-By Benjamin Pimentel; 415-439-6400;
AskNewswires@dowjones.com
