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DELL COMPUTER

CORPORATION
James Hsu

Outline
Executive Summary
Industry Overview

Company Description
Business Strategies
Quarterly Income Statement
Competitors

Ratio Comparison
Porters Five Forces
Stock Performance
News and the latest developments

Discount Cash Flow


DuPont Method

Executive Summary
Recommendation: Hold
Original Purchase: 500 shares @ $41.75 on 12/10/99
Current Price: $28.33 on 11/26/02
DCF result: $20.11 ~ $24.58 assuming 17% sales growth

rate over next 5 years. $25.14 ~ $30.73 assuming 20%


sales growth rate.
Sales growth rate from previous 5 years: 32.06%
Analysts consensus on growth rate for next 5 years
according to MarketGuide.com: 16.99%; Its significantly
lower than the previous 5 year growth rate.
At $28.33, Dell stock is fairly priced, if not slightly
overvalued. However, the Company keeps grabbing
market shares, and the quarterly numbers continue to
improve. Also, its financial strength has been excellent.
Bottom Line: A great company richly priced. Its worth
holding but look somewhere else for better return.

Industry Overview:
Computer and Peripherals Industry
Its been a tough year for this industry. Companies has
been postponing their IT equipment spending until the
economy is recovering.
In the third quarter 2002 total PC shipment was 30.6
million units, down from 34.6 million units from the same
quarter last year.
Many companies purchased a lot of equipments in 1999
to handle enormous amount of data for 2000. Therefore
theres little need for them to buy more equipment in
2000 ~ 2002. The economical downturn and 9/11
terrorist attack slowed down IT spending as well.
However, companies cant defer upgrading IT equipment
forever. Sooner or later, they have to resume their longdelayed IT projects. Valueline predicts that expenditure
on hardware equipment and software should rise by
some 7%~8% in 2003.

Industry Overview (cont.):


Personal computers have become commodity.

Competition is severe in this sector and margin is low.


Lower-end computers (below $1000) with high-speed
internet capability become the main selling force for PC
companies. Dial-up internet will continue to fade away,
and people need to upgrade their computers to satisfy
the demand of high-speed internet.
Competition in peripherals (PDA, printers, etc.) is also
intense. New entrants will drive the margin down even
further.

Company Description
Dell Computer Corporation, incorporated in October

1987, is a computer systems company and a provider of


computing products and services.
The Company's primary product offerings include
enterprise systems, notebook computers and desktop
computer systems. The Dell line of high-performance
computer systems includes PowerEdge servers,
PowerApp server appliances, PowerVault storage
products, PowerConnect networking products, Dell
Precision workstations, Latitude and Inspiron notebook
computers, and OptiPlex, Dimension and SmartStep
desktop computers.
The Company also markets and sells Dell/EMC storage
products under a long-term strategic relationship with
EMC Corporation.

Company Description (cont.):


The Company provides targeted services for consulting,

deployment and support, as well as an extensive


selection of peripheral hardware, including hand-held
products, and computing software.
The Company conducts operations worldwide through
wholly owned subsidiaries. Sales outside the United
States accounted for approximately 35% of the
Company's revenues during the fiscal year ended
February 1, 2002 (fiscal 2002).
Two types of customers: Relationship and Transactional.

Business Strategies
Direct Business Model:

Advantage:
1. Lower cost: avoid dealers markup and pass the saving
to customers.
2. Customized system: customers get exactly what they
wants.
3. Lower inventory: 4 days of supply in inventory, and
ability to incorporate the latest technologies into products
(avoid accumulation of obsolete items in inventory).
4. Save time: takes only 36 hours to manufacture, test,
and ship customized products.
5. Easy for customers to order: either log on
www.dell.com or call 1-800-WWW-DELL.

Business Strategies (cont.):


Aggressive pricing strategy to maximize market share:

Result:
1. Industry-leading results in fiscal 2002 as year-on-year
unit shipments increased by 15% while industry
shipments declined 5%, resulting market share gain in
every region and product line.
2. The Company widened its leading as the worlds No.1
supplier of PC systems (treating Compaq and HP as two
different companies).
3. However, the gross margin declined to 17.7% from
20.2% the previous year.
Reducing workforce and exiting certain facilities to further
cut cost:
Result: Total charges recorded were $105 million. But
expected to result annual saving of nearly $500 million.

Business Strategies (cont.):


Continue to grow in enterprise systems:

The Company announced that it has expanded its line of


network storage systems with the new Dell EMC CX600,
a Fiber Channel storage array that offers enterprise
customers high capacity, performance and availability
while easing the deployment of storage hardware and
software.
Entrance of printer business:
Dell Computer Corp. and Lexmark announced an
agreement for the two companies to develop and
produce Dell inkjet and laser printers and related
aftermarket cartridges that will be sold directly to
customers.
Entrance of PDA business: Axim X5

Quarterly Income Statement


13 weeks ending

Dollar in Millions
(except Per share
values)

11/2/02

8/2/02

5/3/02

2/1/02

11/2/01

total revenue

9144

8459

8066

8061

7468

gross profit

1662

1515

1391

1416

1313

operating income

758

677

590

594

544

net income

561

501

457

456

429

basic normalized
EPS

0.217

0.194

0.176

0.175

0.164

diluted normalized
EPS

0.213

0.189

0.171

0.17

0.157

Competitors in PC industry:
U.S. top five players:

U.S. PC market Share

DELL
25%

OTHERS
40%

IBM GATEWAY
6%
7%

HP
9%

COMPAQ
13%

Competitors in PC industry (cont.):


Worldwide top 5 players:
PC sales slump
Although overall PC sales fell 12 percent worldwide in the third
quarter of 2001 from a year ago, Dell's sales increased.

Compa
ny

Shipments (millions)

Market
share

Growth from 3Q
2000

Dell

4.23

13.8%

10.8%

Compaq

3.18

10.4%

-31.1%

IBM

2.00

6.6%

-17.2%

HP

1.95

6.4%

-24.6%

NEC

1.05

3.4%

-27.5%

Others

18.17

59.4%

-7.8%

Source: Gartner Dataquest

Competitors in PC industry (cont.):


Worldwide PC market share

DELL
14%

COMPAQ
10%
IBM
7%

OTHERS
60%

HP
6%
NEC
3%

Competitors in PC industry (cont.):

DELL
current price
Market Cap.
P/E (ttm)
Sales (ttm)

HPQ

IBM

$28.67

$19.29

$86.20

$74.3B

$58.9B

$145.7B

38.59

NA

26.14

$3.55
$1.15B
NA

$33.7B

$56.6B

Profit Margin (ttm)

5.90%

-1.60%

7.20%

-5.30%

Operating Margin (ttm)

7.80%

-2.70%

7.40%

-9.20%

42.54%

-4.65%

25.67%

-18.61%

ROE (ttm)

11/26/02

$80.3B

GTW

$4.25B

Competitors in PC industry (cont.):

Competitors in PC industry (cont.):

Competitors in PC industry (cont.):

Ratio Comparison
Valuation Ratios
P/E Ratio (TTM)

Company

Industry

Sector

S&P 500

36.04

25.06

31.68

23.17

P/E High - Last 5 Yrs.

105.71

45.51

67.30

49.97

P/E Low - Last 5 Yrs.

21.29

17.99

19.96

17.40

Beta

1.89

1.54

1.75

1.00

Price to Sales (TTM)

2.07

1.32

3.76

2.63

Price to Book (MRQ)

14.02

6.44

3.76

4.18

Price to Tangible Book (MRQ)

14.02

6.84

4.66

7.05

Price to Cash Flow (TTM)

32.28

22.86

21.15

15.80

Price to Free Cash Flow (TTM)

20.95

14.68

21.35

26.88

% Owned Institutions

55.30

50.12

46.01

61.40

Ratio Comparison ( Cont. )


Growth Rates(%)

Company

Industry

Sector

S&P 500

Sales (MRQ) vs Qtr. 1 Yr. Ago

11.14

9.74

6.53

3.74

Sales (TTM) vs TTM 1 Yr. Ago

-1.61

-5.55

-2.45

1.58

Sales - 5 Yr. Growth Rate

32.06

11.91

19.25

11.33

EPS (MRQ) vs Qtr. 1 Yr. Ago

NM

-73.69

10.50

11.88

EPS (TTM) vs TTM 1 Yr. Ago

29.38

-8.66

-14.33

4.20

EPS - 5 Yr. Growth Rate

21.87

8.18

10.32

8.71

Capital Spending - 5 Yr. Growth Rate

21.59

5.90

15.54

10.28

Ratio Comparison
Financial Strength

Company

Industry

Sector

S&P 500

Quick Ratio (MRQ)

0.83

0.97

2.32

1.09

Current Ratio (MRQ)

1.03

1.27

2.83

1.61

LT Debt to Equity (MRQ)

0.11

0.41

0.25

0.74

Total Debt to Equity (MRQ)

0.11

0.62

0.33

1.02

NM

21.47

8.87

9.52

Interest Coverage (TTM)

Ratio Comparison ( Cont. )


Profitability Ratios (%)

Company

Industry

Sector

S&P 500

Gross Margin (TTM)

17.58

28.86

50.56

47.7

Gross Margin - 5 Yr. Avg.

20.62

30.51

52.97

48.87

EBITD Margin (TTM)

8.18

8.31

18.16

21.12

EBITD - 5 Yr. Avg.

9.64

12.79

22.78

22.15

7.5

4.72

11.82

17.65

Operating Margin - 5 Yr. Avg.

8.99

9.04

16.96

18.19

Pre-Tax Margin (TTM)

8.09

6.02

12.31

14.93

Pre-Tax Margin - 5 Yr. Avg.

9.56

10.04

20

17.06

Net Profit Margin (TTM)

5.75

4.11

6.88

10.57

Net Profit Margin - 5 Yr. Avg.

6.65

6.95

12.44

11.23

28.92

29.06

31.56

33.34

30.2

29.57

33.59

35.79

Operating Margin (TTM)

Effective Tax Rate (TTM)


Effective Tax Rate - 5 Yr. Avg.

Ratio Comparison
Management Effectiveness (%)

Company

Industry

Sector

S&P 500

Return On Assets (TTM)

13.69

6.27

3.9

6.36

Return On Assets - 5 Yr. Avg.

19.46

11.13

10.03

8.05

Return On Investment (TTM)

30.46

12.62

6.38

10.11

Return On Investment - 5 Yr. Avg.

42.98

22.05

15.26

12.85

Return On Equity (TTM)

39.19

21.32

8.77

18.06

55.9

35.77

20.41

21.86

Return On Equity - 5 Yr. Avg.

Porters Five Forces & Analysis

Threat of New Entrants: MODERATE


Low capital investment for independent

stores
Low product differentiation

Brand name may be a barrier to entry

Low economies of scale


No legal or governmental barriers
Decreasing profitability shows that

there is a threat of new entrants

Porters Five Forces & Analysis (cont.):

Rivalry: HIGH
High concentration

Price War: Low Margin


Decreasing profitability
Low differentiation

However, in the midst of sever

competition, Dell can still gain market


share from other competitors. That
proves Dells business strategies have
been successful.

Porters Five Forces & Analysis (cont.):

Threat of Substitutes: LOW


Strong presence of PCs throughout

society

One computer for every three people in the


U.S.

Only substitute for PC: Apple Computer.

However, high price, and lack of software


support prevent people from switching to
Apple system.

Porters Five Forces & Analysis (cont.):

Bargaining Power of Buyer: High


Highly price sensitive

Reliability and customer service become

important factors.
Dells products are very reliable and
customer service is outstanding. These
two factors help Dell to create certain
brand royalty. But thats given the fact
that the Company set the prices very
low. If the prices are raised too high,
customers will not hesitate to switch.

Porters Five Forces & Analysis (cont.):

Bargaining Power of Suppliers: HIGH


Large number of suppliers for

components like hardware, keyboards,


etc.
But two major inputs are monopolized

Microsoft standard for all PCs


Intel standard for most PCs

High switching costs

Stock Performance

Stock Performance (cont.):

News and the Latest Developments:

- Dell Computer Corp. To Unveil Smaller

Servers For Companies:


The Wall Street Journal reported that Dell
Computer Corp. is expected to enter the market
for ultrasmall server computers, unveiling a
radical design that shrinks the size, power
consumption and cost of running business
computers. According to the Journal, Dell's
1655MC computer is a "blade" server that
packages processor, memory and disk storage
in book-size blocks that slide into a shared
chassis like blades on a pen knife.

News and the Latest Developments (cont.):


Dell Computer Corp. Issues Q4 Guidance In-

Line With Analysts' Estimates:


Dell Computer Corp. announced that its fourth
quarter shipments could increase 10% from the
third quarter, or 23% from the year-ago period.
Fourth quarter 2002 revenues are expected to
be up about 20% year-over-year, to nearly $9.7
billion. With anticipated further improvement in
operating margins, the Company expects fourth
quarter earnings per share of 23 cents, which is
35% higher than last year. Wall Street analysts
on average are expecting the Company to earn
23 cents per share on revenues of $9.69 billion
in the fourth quarter, according to Multex.

News and the Latest Developments (cont.):


Dell Computer Corp. Offers Customers New

3.06GHz Processor Option:


Dell Computer Corp. announced the
availability of the Intel Pentium 4 processor
running at 3.06GHz on select Dimension and
OptiPlex desktop computers, and Dell Precision
workstations. Customers can purchase systems
with a 3.06GHz processor utilizing HyperThreading (HT) Technology, which can enable
customers to do more tasks in less time. The
technology makes more efficient use of
processing power by utilizing moments of idle
cycles that allow for the processor to work on
more than one request simultaneously.

News and the Latest Developments (cont.):


Dell Computer Corp. Will Enter The

PDA Market:
Dow Jones reported that Dell Computer
Corp. will release its first personal digital
assistant (PDA) products in the U.S. in
late November. According to the Journal,
Dell will release two PDA products in
time for Christmas, with the official
launch date Nov. 18.

DCF and DuPont method


Go to the excel spreadsheet

Valuation: P/E Approach


Assume 17% growth in sales
Annual rate of return is calculated using cost

base = $41.75. Trade date was on 12/10/99.


Case 1: use current P/E = 37
Price in 2/1/2008: $69.46, annual return =
6.49%
Case 2: use S&P 500 P/E = 28
Price in 2/1/2008: $54.02, annual return =
3.23%
Case 3: use P/E = 20
Price in 2/1/2008: $38.59, annual return = 0.97%

Valuation: Growth in Sales


Terminal Growth Rate = 4%
Case 1: Analyst consensus growth rate = 17%

Fair Value = $20.11 ~ $24.58


Case 2: Dells 5 yrs growth rate = 32.06%
Fair Value = $51.16 ~ $62.53
Case 3: growth rate = 10%
Fair Value = $10.20 ~ $12.47
Case 4: growth rate = 20%:
Fair Value = $25.14 ~ $30.73