Earnings Preview: Dell (DELL)

Tomorrow afternoon (Thursday) we’ll get to see the ‘earnings’ out of Dell Inc. (DELL-NASDAQ).  The street is looking for $0.29 EPS & roughly $14.88 Billion revenues.  The earnings and revenues may not be the issue here, even though they managed to surprise the street with their last earnings report not looking as bad as expected.  Keep in mind that we might not get the full picture because of filing issues and it should not be a shock to investors if they have been looking at the news.  This will also mark the end of the year as the fiscal end is JAN-2007.

As of options prices today it appears that options traders are factoring in a move of no more than $0.75 if you back out the 2-weeks of time value.   The short interest has shrunk from January’s 34 million shares down to 29.8 million in February.  About all you will get out of any major technical analysis from the stock chart here is that it is at least it is within a few percentage points of levels that have acted as support in the past. 

Based on how the stock has traded, no one in their right mind can be expecting any huge upside blowout tomorrow.  Michael Dell announced he was re-seizing control back on January 31 and the stock is actually down about 5% since that date.  Before you go bashing Michael Dell for not staging an instant turnaround, you better look at Hewlet-Packard (HPQ) which is down about 8% since that January 31 mark and is also down since its earnings.  Because HPQ is already known to have recaptured the #1 PC seller and since it has doubled in about 2 years, we all know the great story that has happened there.  HPQ now mas a market cap of $107.5 Billion; DELL has a $51 Billion market cap and it has essentially been chopped in half over the last two-years.

The Inquirer has speculated on market chatter of a retail deal coming down the pipe for DELL, but not with specifics.  The specifics of a ‘retail deal’ would revolve around what is in the deal for each side (the company and a retailer).  Ideally, Best Buy (BBY) would be the best partner; but Dell would have the least amount of leverage there compared to leverage at a Circuit City (CC), Radio Shack (RSH), and elsewhere.  While this would potentially be monumental in its impact against other PC makers like H-P (HPQ) and Gateway (GTW), this would actually not be the absolute first dabbling of off the street sales.

The company still has a long way to go to fix itself.  My partner speculated that the company may be hard to fix and may have to live with much lower growth rates.  That may be true and it may not.  I personally do not believe that Michael Dell reassumed control just so that he could be a whipping boy on Wall Street.  A retail deal would certainly ad some kick, but it is very possible that the retail deal may be more targeted and more generic than people expect.  What if it was just for service repairs, printer cartridges, and maybe laptops?  If I had a real great guess I would offer it.

There is another possibility.  Dell may announce even more restructuring into more customer-service oriented company than it is thought of today.  It ‘could’ even consider a transformational change, although please do NOT interpret that as a prediction that they will go start buying up service and niche companies galore.  Dell has been sprucing up management where it could and it is going to be a long turnaround.  I have no idea what Michael Dell will launch yet as his exact attack plan, but chances are that it will be much more than a mere round of layoffs and bonus cessation program.  Most likely Mr. Dell himself will unveil a loose timeline or he will set a date for analysts and media where he will unveil his HP-killer plan. The last stockholder annual meeting was last July, and he probably wont want to wait 5 more months to unveil anything.  It may not happen and I don’t want to create any drama here.  You just have to know how aggressive and demanding he can be and know he didn’t yank Rollins out of the slumbering CEO seat to come back just to run a status quo ship.

Jon C. Ogg
February 27, 2007

Jon Ogg is a partner in 24/7 Wall St., LLC and he can be reached at [email protected]; he does not own securities in the companies he covers.