For You Believers in DELL

[txlaw]

I hope when you work out balance sheet cash you are subtracting recievables from payables.  My last look, months ago, showed that payables were double receivables.  You could treat this as float earning 0.5% I suppose, but is definitely not cash.  This is especially true in the service industry Dell is moving toward, where you need to make your payrolls at the same time as you receive your revenue, or even earlier.

 

I'd go a step further.  Be conservative in your quantitative analysis and projections.

 

Only consider current assets as excess to the extent they are above working capital, despite the negative working capital model.  Of course, take into account finance receivables and the relationship with debt on the right side of the balance sheet.

 

Build product revenue decline into your model and be conservative with the margins you think they can earn.  Realize that some amount of SG&A is investment expenditure rather than maintenance expenditure.  Also realize that some amount of cash flow must be put into acquisitions to continue to transform the company.

 

Finally, after you have done that, set aside the quantitative aspects of the investment -- don't be fooled by the notion that DELL is "statistically cheap."  Instead, tear apart the business as a businessman would and see if you think their strategy for the future is correct.

 

After I do that, I come to the conclusion that DELL is cheap.

[Ballinvarosig Investors]

The Perot acquisition was actually pretty good.

30x earnings for a mediocre business?

Under this scenario, the cash stemming from working capital will accrue to shareholders in some form.

I suspect Dell will continue to deploy free cash flow in a less than optimal way.

 

Dell at $12.50 is cheap, and might even be worth tactically trading. I wouldn't want to make it a long-term holding though.

[txlaw]

Only consider current assets as excess to the extent they are above working capital, despite the negative working capital model.  Of course, take into account finance receivables and the relationship with debt on the right side of the balance sheet.

 

And to clarify, the excess cash noted above should also be netted against long term debt.

[txlaw]

One final thing to point out.  Ultimately, capital allocation is the key factor for DELL. 

 

You have to believe that DELL is deploying capital appropriately when it makes its acquisitions, such that DELL is making a good ROI on the acquisitions and making its total portfolio stronger in the context of providing productivity solutions.  In order to make such a judgment, you need to have some understanding of the businesses they are buying into and the way that DELL leverages its customer base for these acquired businesses, rather than looking solely at quantitative aspects of acquisitions. 

 

For example, when, DELL acquires Wyse Technologies, you have to ask yourself whether the acquisition makes sense and what that means strategically for DELL. 

 

If you think Compellent or Perot were bad acquisitions, you'll never believe that DELL is a good value for the long term.

[Munger]

Capital allocation will be the critical variable -- no doubt.

 

But no one should kid themselves into believing they know what Dell's business (or any tech company) will exactly look like in 5 years, most especially Jim Chanos who readily acknowledges a holding period of 6-9 months.  Dell is appealing in the context of a pari-mutuel betting system, an analogy Charlie Munger has discussed in the past. 

 

Some opportunities are attractive because the bookie (in our case Mr. Market) is giving fair odds on a great horse while others are attractive because the bookie is offering fantastic odds on a decent or even run down horse.  Most often, a pari-mutuel system provides odds that offer little advantage to the investor.  In rare cases, the bookie stops thinking clearly and offers great odds on a dominant horse and this is the time to act with large amounts of your capital. 

 

Based on what we know today, Dell is probably still a decent "horse" (with the potential to be a great horse) and Mr. Market is offering odds heavily in our favor.

 

Instead of reading those interviews and thinking of all the ways we can make money from Dell, let's invert and think of how we permanently lose money.  Given that capital allocation is the critical variable, Michael Dell would have to drive his current business into a massive ditch (never adapting as circumstances change) and blow through $17.2B of cash. 

 

Is this dire scenario possible? -- absolutely.  Is it likely? -- any rational conclusion would have to be that the scenario is highly unlikely given Michael Dell's proven track record and the company’s current competitive strengths.  Even if Dell suffers a permanent 60% cut in FCF from 2011 levels and only grows that new lower number at 2% annually in the future, you still make a lot money on this investment...assuming capital allocation is prudent. 

 

Dell will be a fascinating case study as the future unfolds...will either prove one of the rare, great investment opportunities or one of the great business tragedies in history -- the man who built a multibillion $ global enterprise from a company started with $10,000 in his dorm room and then blew it all.  There really is no in between at current valuations because if the company just survives (even if 60% smaller), investors make money on Dell.

 

 

 

 

[Rabbitisrich]

I may have imagined it, but did anyone see a newsticker showing that Dell will institute a $0.32 quarterly dividend next year?

[Parsad]

No, you did not imagine it!  I'm glad we bought quite a bit when the price got hammered over the last couple of weeks!  ;D  Cheers!

 

http://finance.yahoo.com/news/dell-shares-rally-company-announces-200300191.html

[Rabbitisrich]

Whoops, I said that it was quarterly in the post above. It's an annual dividend.

[Parsad]

Whoops, I said that it was quarterly in the post above. It's an annual dividend.

 

It's ok, I mis-read your post and thought you meant annual too.  Cheers!

[PlanMaestro]

No, you did not imagine it!  I'm glad we bought quite a bit when the price got hammered over the last couple of weeks!  ;D  Cheers!

 

I still don't think DELL is really cheap.  It's fair to slightly undervalued in my mind based on its ability to grow its cash flows, and the lack of competitive advantages.  Cheers!

« Last Edit: May 22, 2012, 03:19:03 PM by Parsad »

 

???

 

[tombgrt]

No, you did not imagine it!  I'm glad we bought quite a bit when the price got hammered over the last couple of weeks!  ;D  Cheers!

 

I still don't think DELL is really cheap.  It's fair to slightly undervalued in my mind based on its ability to grow its cash flows, and the lack of competitive advantages.  Cheers!

« Last Edit: May 22, 2012, 03:19:03 PM by Parsad »

 

???

 

 

Indeed. Can't even believe Parsad actually said this. Where is the sudden change of heart coming from? A 20% drop from fairly valued (or slightly undervalued) shouldn't cut it. When posting the message on May 22 he did in fact already know the after hours stock price... Especially in the light of this topic -> http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-four-to-audit-spain's-banks/ where he stated again to have plenty of cash. Surely you must find better things than something that is 20-30% undervalued without competitive advantages if you hold plenty of cash waiting for the big opportunities.

 

I can understand you sold the BAC puts right before the day the stock went up 8-10%, even if it was languishing at that level for a few weeks already. That's just lucky timing after a good weekend discussion with moore.  ;D But I really can't see the logic here. Would you mind to explain your vision Parsad? TIA. :)

[Parsad]

No, you did not imagine it!  I'm glad we bought quite a bit when the price got hammered over the last couple of weeks!  ;D  Cheers!

 

I still don't think DELL is really cheap.  It's fair to slightly undervalued in my mind based on its ability to grow its cash flows, and the lack of competitive advantages.  Cheers!

« Last Edit: May 22, 2012, 03:19:03 PM by Parsad »

 

???

 

 

Indeed. Can't even believe Parsad actually said this. Where is the sudden change of heart coming from? A 20% drop from fairly valued (or slightly undervalued) shouldn't cut it. When posting the message on May 22 he did in fact already know the after hours stock price... Especially in the light of this topic -> http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-four-to-audit-spain's-banks/ where he stated again to have plenty of cash. Surely you must find better things than something that is 20-30% undervalued without competitive advantages if you hold plenty of cash waiting for the big opportunities.

 

I can understand you sold the BAC puts right before the day the stock went up 8-10%, even if it was languishing at that level for a few weeks already. That's just lucky timing after a good weekend discussion with moore.  ;D But I really can't see the logic here. Would you mind to explain your vision Parsad? TIA. :)

 

I went home that day and spent the entire night tearing apart their last three 10-K's and all of their filings during the period.  I was somewhat wrong on what Dell's future cash flows will look like!  The business had changed considerably in the last 3 years.  I wanted to post on here to retract my statements later on, but then I also didn't want anyone to know we were buying stock.  We started nibbling and then added considerably below $12.  It's not a huge position, but it is a fair size one.  We hoped the stock would get even cheaper. 

 

While they will continue to struggle on the consumer side, their greater focus on becoming a complete end to end user service provider and increased server/enterprise business, is changing the company entirely.  More residual income from their services and contracts, and less one-time sale income as a retailer.  Not entirely different than the model many other technology companies are now extending, like Apple, Microsoft, etc. 

 

Many of the contracts Dell has in place are quite lucrative and long-term in nature, and they have somewhat cornered the market on government contracts...there's your competitive advantage.  Their streams of income are diverse and cash flows are increasing.  While they don't like the comparison, they are right in the footsteps of IBM, but trading for a significantly cheaper price. 

 

Like I said before, I don't work in a vacuum.  If I'm wrong, and the analysis is incorrect, I have to adjust it accordingly.  I was wrong on what the business is going to look like five-ten years out.  Cheers!     

[rogermunibond]

Dell bought Perot Systems, HP bought EDS, Xerox bought ACS, then there CSC.  All have chunks of the government business process outsourcing market.  Dell has hardly cornered the market on govt contracts for services.

[PlanMaestro]

While they will continue to struggle on the consumer side, their greater focus on becoming a complete end to end user service provider and increased server/enterprise business, is changing the company entirely.  More residual income from their services and contracts, and less one-time sale income as a retailer.  Not entirely different than the model many other technology companies are now extending, like Apple, Microsoft, etc. 

 

Many of the contracts Dell has in place are quite lucrative and long-term in nature, and they have somewhat cornered the market on government contracts...there's your competitive advantage.  Their streams of income are diverse and cash flows are increasing.  While they don't like the comparison, they are right in the footsteps of IBM, but trading for a significantly cheaper price. 

 

Like I said before, I don't work in a vacuum.  If I'm wrong, and the analysis is incorrect, I have to adjust it accordingly.  I was wrong on what the business is going to look like five-ten years out.  Cheers!   

 

When facts change ... it still confuses me that the latest Q revenues were down across all segments not just consumer.

 

[Liberty]

Question for you Dell holders out there: Does the company break out its operating margins by segment, and if so, what are they like for their service/SaaS segment?

[SI]

No, they have said non-PC businesses last quarter are more than 50% of gross profit. In today's press release they said that their high value business will contribute operating income in excess of 5 percent of revenue in future contribution.

 

Getting to the matter at hand which is separating the PC business from the high value business this is the other things I would think about.  Dell has said consumer is 19% of revenue. Maybe more importantly, today they have said non-PC businesses will grow 10% through 2016. It is slightly vague but assume 2016 is 4 fiscal years.

 

Now the P/E multiple is quite low anyway but here is a rough take at what today's press release implies:

-This year they are slated to do a total of $13.1Bn in gross profit. Assuming 50% that is PC is not growing.  So non-PC gross profit of $6.55Bn in 4 years grows to $9.6B in 4 years and you have $16.1B in gross profit when you add back the $6.5B PC gross profit that is not growing.

-Bernstein has opex of $9.2B in 2014(farthest out they go) which if it grows at a 5% clip from there means by 2016 it is $10.1B in opex.

-So $6B in EBIT by 2014 is taxed at 20% meaning $4.8B in net income.

-Bernstein has them shrinking shares at 2.5% per year for the next two years but assume they don’t buyback any addl stock in year 3 & 4 which is conservative even when you consider today’s divd that leaves you with 1.74B shares as your denominator and $2.76/share in 4 years.

-Discounted back at 10% that would mean: $2.07 $2.28, $2.51, $2.76 over the next 4 years. Assuming no growth in PCs(or opex redux that would go with PCs in ex-growth), no buybacks in the 2 out years of your forecast period and that FCF doesn’t exceed earnings you would be well in the money with those 4 years of earnings which sum to $9.62/share and YE net cash of $5.70/share.

 

A few other things to add:

-One other way to think about it, the 2016 EBIT of $6Bn looks funny next to today’s EV which is $12Bn.

-Some would argue that no growth in PCs is conservative.

-FCF has always been well in excess of net income.

-The net cash per share estimate is morningstar's.

-$2.07 is well above Wall Street's estimate this year which last I looked was ~$1.90 though $2.07 is probably shy of Wall Street estimates of FCF this year.

[txlaw]

I like hearing Michael Dell say that the dividend will be paid into "perpetuity."

[Parsad]

Dell bought Perot Systems, HP bought EDS, Xerox bought ACS, then there CSC.  All have chunks of the government business process outsourcing market.  Dell has hardly cornered the market on govt contracts for services.

 

Sorry, I should have clarified what I meant...that they are moving up quickly in terms of government contracts. 

 

- Dell was the 57th largest government contractor in 2008, then 53rd in 2009 and moved up to 41st in 2010. 

- During the same periods, IBM was ranked 42nd in 2008, 37th in 2009 and 44th in 2010.

- HP was ranked 25th in 2008, out of top 100 in 2009, and 39th in 2010.

- Xerox was not ranked in the top 100 in any of those 3 years.

 

Cheers!

[txlaw]

Lou Gerstner on CNBC.  Must watch for DELL shareholders:

 

http://video.cnbc.com/gallery/?video=3000095377

http://video.cnbc.com/gallery/?video=3000096537

http://video.cnbc.com/gallery/?video=3000096580

[Guest hellsten]

Michael Dell explains what Dell might look like 10 years from now:

http://www.forbes.com/sites/robenderle/2012/04/16/michael-dell-on-dells-present-and-future-success/

 

In 2022 Dell has become a true end-to-end solution provider, vertically-focused, solutions-focused and creating value for customers. We are not a copy of HP or IBM.

We will have end to end solutions, but rather than being based on thinking that goes back decades, our solutions will be based on contemporary thinking by young companies that have already proven their success.

We aren’t planning on being the next anyone else; we are planning on making everyone else want to be the next us.

 

And some insights into their acquisition strategy:

We look at over 250 companies a year to fill gaps we have identified in our product lines. We then generally partner with many of them to understand their strengths and weaknesses and then purchase the few that make sense for us to own.

Using EqualLogic as an example we were able to grow their 3,000 customers to over 50,000.

 

Dell's biggest competitive advantage is arguably Michael Dell, his long-term plans and capital allocation skills.

 

Wonder who they will buy next:

http://en.wikipedia.org/wiki/List_of_Dell_ownership_activities#Acquisitions

 

5 already in 2012…

[Ballinvarosig Investors]

Dell to buy Quest Software for $28 a share.

 

http://www.nasdaq.com/article/dell-to-acquire-quest-software-for-236-billion-following-bidding-war-20120702-00542

 

Looks expensive to me.

[txlaw]

Just to reiterate what Plan said, DELL today is different than DELL in 1997.  The price may be the same, but the company is not.  Big difference.

 

I suspect DELL will trade at low levels for a while because the Chanos "value trap" thesis is going to be the talk of the value investor community, who are the only people who really believe (or used to believe) in DELL.

 

Looks like Chanos is switching from shorting DELL to shorting HPQ:

http://www.cnbc.com/id/48228416/

 

Chanos will likely be right in the short term despite his superficial analyses of those companies.

 

Plan, if we see a real collapse in HPQ's price, you may want to start tracking as a potential turnaround. 

[PlanMaestro]

Thx Txlaw. I've been following it, but the volatility of earnings (including services!)  keeps me in the wait and see camp.

 

Also, Meg Whitman made some comments about the turnaround taking several years ... lack  of sense of urgency. And Whitman's eBay gig does not nudge me into thinking she is the right woman for the job. She should know better having worked at Bain & Co. and should read articles from Stan Pace ... even better contact him. (Fast, focused, and simultaneous)

 

http://www.bain.com/Images/SL_The_strategic_leader.pdf

http://www.bain.com/bainweb/PDFs/cms/Public/SL_Rip_band-aid_off_quickly.pdf

 

It's the same thing that stops me from investing in RIMM and Yahoo. Companies with turnaround potential, cash flow and assets that give them time, but lack of urgency and execution. On those dimensions Dell seems to be doing a much better job (maybe the Bain DNA).

 

I've been happy adding more AIG and BAC the last few days.

[txlaw]

Thx Txlaw. I've been following it, but the volatility of earnings (including services!)  keeps me in the wait and see camp.

 

Also, Meg Whitman made some comments about the turnaround taking several years ... lack  of sense of urgency. And Whitman's eBay gig does not nudge me into thinking she is the right woman for the job. She should know better having worked at Bain & Co. and should read articles from Stan Pace ... even better contact him. (Fast, focused, and simultaneous)

 

http://www.bain.com/Images/SL_The_strategic_leader.pdf

http://www.bain.com/bainweb/PDFs/cms/Public/SL_Rip_band-aid_off_quickly.pdf

 

It's the same thing that stops me from investing in RIMM and Yahoo. Companies with turnaround potential, cash flow and assets that give them time, but lack of urgency and execution. On those dimensions Dell seems to be doing a much better job (maybe the Bain DNA).

 

I've been happy adding more AIG and BAC the last few days.

 

Thanks for those links.  Will take a look.

 

I'd agree with your point on sense of urgency, although in RIM's case, the urgency is likely being ratcheted up internally given all the market pressure and media pressure. 

 

I'm just monitoring HPQ at this point.  I'm a DELL investor, but the turnaround/transformation at DELL hasn't born fruit in terms of market price (not too worried about IV). 

 

Have been adding substantially to AIG over the last couple of weeks.

[mcliu]

Do you guys know if there's a way to estimate how Dell's acquisitions have performed since their acquisition? Or if there's a way to break-out acquisition revenues/operating income from existing businesses? Also, does Dell breakout gross margins by product line?

 

I find what Dell said about growing EqualLogic's customer base from 5,000 to 30,000 to be quite interesting. If they're able to ramp up distribution/sales at that rate, these pricey acquisitions don't seem that expensive.