What is Dell worth?
It's a whole lot more than a PC seller and should fetch a buyout price of at least $14.75 a share.
The popular question of the day is, what to do about Dell (DELL)? I can't suggest what any one investor should do, but I can share my views on the company, and why I think its stock is worth at least $14.75.
With rumors of a private equity buyout, the price of DELL surged to hit a high of $13.24 recently. Then, amidst skeptical reports from pundits who still view Dell as just a PC company, the stock retreated and today as trading around $12.80. Personally, I believe the pundits are wrong.
My view has been that the most significant problem for Dell and its stockholders is the fact that management has done a poor job articulating the message that it is no longer only a PC company.
Dell has successfully restructured its business model and should now be viewed as an Enterprise Ecosystem company. Selling PCs is a part of this model, but most certainly not the core.
However, unfortunately for Dell and its stockholders, that clear fact has not been embraced by the analysts covering it.
I've previously presented two pieces of evidence supporting my contention that Dell has changed its business model and should be viewed differently.
If we go back a dozen years to when the company was the undisputed worldwide king of the PC sector, Dell recognized revenue when it shipped a product and deferred only a very modest reserve for warranty issues. As it moved to a more enterprise-centric business model the amount of deferred revenue increased substantially and it is now clearly broken out in current and non-current liabilities.
The two primary contributors to this deferred revenue are long-term service contracts and software. At the close of quarter ending Nov. 2, 2012, deferred revenue totaled just shy of $8B, or nearly 60% of DELL's reported revenue for the quarter.
Only four years ago total deferred revenue was less than 37% of reported revenue. This is a clear indication there has been a change in DELL's business model.
The fact that deferred revenue has consistently grown quarter to quarter is a clear indication that whatever has changed is probably positive.
The second piece of evidence supporting my contention that DELL operates today with a substantially different business model than it has in the past can be seen in its gross profit margin profile.
During the 10 years prior to the quarter that ended in October 2010, Dell only once reported a gross profit margin above 20%. However, beginning with the October 2010 ending quarter, Dell has consistently reported a gross profit margin in the low to even mid-20% area.
If Dell is in fact a PC company, as it is presented to be by the pundits, and the PC market has been lackluster as we all know it has been, then why has the company's gross profit margin gone up so much? As I see it, the answer to this question is self-evident -- the pundits are wrong or at least missing something important.
Following its report for the quarter ending Nov. 2, Wall Street sold off DELL with a vengeance. At that time, I estimated its full value price to be $14.75. Personally, I continue to view it as being worth $14.75 per share.
While I could rationalize a higher price based on the company's positioning and strong cash flow that aligns well with its reported earnings, I think given the 66.5% premium from the price last November, that is about what it would take to get a deal done.
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