What About Dell?

By Reuters  |  Print this article Print

In spite of the drama swirling around technology giant HP over its ousting of CEO Mark Hurd and hiring of ex-SAP CEO Leo Apotheker, the company is expected to report a strong quarter. Meanwhile, rival Dell's quarter is more in question as industry watchers caution on Dell's reliance on government spending at a time when such spending appears to be slowing.

Dell is much more of a question mark, analysts say. Investors in the No. 2 PC maker, which reports earnings on Thursday, got jittery last week after Cisco's weak revenue outlook sent its shares plunging.

Although it is unclear whether the drop in government spending highlighted by Cisco is a broader issue, analysts warned of Dell's potential exposure. The company's public business provides around a quarter of its revenue.

"Cisco's commentary raises a red flag on Dell's above-peer government exposure," JP Morgan analyst Mark Moskowitz said in a research note.

Dell, which has been in turnaround mode for some time, has been a major beneficiary of the corporate refresh cycle, where companies spend billions to upgrade aging IT hardware.

But the company has struggled to show progress on profitability. Despite efforts to diversify, more than half its revenue still comes from its low-margin PC business.

Investors will therefore once again focus on Dell's gross margin, which Wall Street has targeted at 17.5 percent.

"The question really is, can they turn the growth they've seen into profitability?" said Morningstar's Holt. "That's where they've really struggled, in the operating leverage, or lack thereof."

Still, Dell should benefit from an effort to improve margins in its consumer business, which has been a drag on profitability, and better component costs. Analysts are expecting Dell to report earnings of 32 cents a share on revenue of $15.7 billion.

According to StarMine, Dell's shares are also undervalued, with an intrinsic value of $18.25 versus Tuesday's close of $13.40. (Reporting by Gabriel Madway; Editing by Edwin Chan and Richard Chang))