15 Companies That Management Can’t Fix: Dell

There are certain companies that probably cannot be turned around no matter who runs them. They tend to be in industries where macro-economic trends are against them, like the buggy whip business 150 years ago.

Investors are not likely to get much out of these firms, unless and until the trend that is hurting them is reversed

Dell (DELL) reported earnings yesterday. At least partial figures, with earnings and revenue falling. Issues with the company’s revenue recognition will probably prevent it from giving a complete picture of its finances for some time.

Dell faces several operational issues which it may not be able to address. One is a flattening in growth in PC sales, especially in the US. Another is a loss of market share. Yet another is the resurgence of rival Hewlett-Packard (HPQ). Dell’s model of selling directly to customers may be a handicap as other PC companies sell through retail chains. And, it has already taken so much cost out of the company by working down component prices from suppliers that there is not much left in that area to cut costs.

American Technology Research recently made the case that Dell’s business model is almost completely broken.  Quoted in Barron’s the firm said: "In our view, DELL needs to fundamentally change the way it does business where its direct model is at a structural disadvantage in addressing consumer and international markets."

Whether Dell changes its sales model or not, PC shipment growth is slow. In 2007 iSuppli estimates that global growth will only be about 10%. With drops in Dell’s market share, a rapidly growing market would certainly help revenue, but that does not seem to be on the horizon. And Gartner Group is forecasting that even the slow growth will come with a cost as PC prices drop and the revenue from sales actually contracts.

There is the temptation to look at the success at Hewlett-Packard and ask whether Dell can replicate it. But, HP is not doing as well as it might appear at first glance. The company’s guidance disappointed Wall St.  In its most recent quarterly report, notebook revenue rose almost 20% quarter over previous quarter, but desktop sales were little more than flat. And, HP has its huge printer business to help buttress its overall hardware sales. Dell’s server sales revenue for 2006 was flat, so the company probably cannot look to that business as a driver for growth.

Dell will certainly be around for a long time. But, the macros of the PC business and the level of competition from HP and manufacturers in the Far East will make it hard for the company to grow. Dell is probably going from a company that was growing 15% to 20% two years ago to one where 5% to 10% growth is the norm.

And, that is not going to get the markets excited.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.