Through The Fly's Eyes: Dell Inc

from Theflyonthewall.com











Patiently Build Position In Stock

Dell (DELL) most likely has a good six-to-nine months of work before management changes begin to show up in results.

Last night's earnings release, by Dell's standards, were simply awful:

• Reported revenue declined 5%; when adjusting for an extra week in the previous year, however, revenue increased 3%--still awful
• Operating margins are now down to 4.9%--not good.

While Dell's results point to a growth company gone bad, there is some room for optimism. Gross margin came in at 16.9%, versus estimates at 16.5%. So the worst in gross margin performance might be behind the company. However, SG&A expenses were higher.

Why build a position in Dell? HP's operating margin is 7.6%, margins that Dell used to hit. Also, Dell, in its peak years, would generate gross margins over 20%. Therefore, Dell, if it can get its house in order, could show some nice operating leverage.

Another potential positive is that at some point the industry will have a PC upgrade cycle. This could put some wind into Dell's sails. Don't throw Dell's stock out with the bath water. Chip away on market corrections. The stock, if a turnaround plan is well-executed, should hit $30 on signs of improving business and margin trends.