Dell Preview: Crouching Tech, Hidden Investor (DELL)

Dell Inc. (NASDAQ: DELL) is set to report earnings after the close of trading today.  The troubled PC giant is expected to post $0.26 EPS on $14.18 billion in revenue.  There are many other metrics that traders will need to consider beyond earnings and guidance.  And the bias about the company ahead of the report may be as important as ever.
Keep in mind that expectations have come down.  Three months ago the First Call estimate was $0.32 EPS.

For the coming quarter, First Call has estimates at $0.25 EPS and $13.58 billion in revenues.  These numbers have also come down over the last 3 months.  Analyst expect yearly earnings of $1.14 EPS on $55.5 billion in revenue.  As far as how the estimates stack up, the forward estimates imply more than a 15% decline in earnings on a 10% decline in revenue.

Dell has already announced cost cuts and layoffs with a target of roughly $3 billion in reductions by the end of fiscal-2011.  The company has also rolled out some zero-percent financing initiatives for small- and medium-sized businesses.  We have consumers are snapping up lower and lower priced netbooks, laptops and desktop PC’s that are all in the sub-$500 level.  That and the lower IT spending are all working against margins.

At $8.40, it is getting very hard to use stock options for any analysis.  If we had to put a figure on it, we’d say that options traders are braced for a move of about $0.75 in either direction.  Since this stock’s 52-week trading range is $7.84 to $26.04, we won’t bother with much chart analysis either.

Almost all of the large analyst calls or changes have been negative as the climate has continued to weaken.  Analysts do still have a price target north of $13.00, so there is still an implied 50% increase if that number remains static.

There is one last notion that we want you to consider.  The downside-bias is so large here that you have to wonder what is or is not priced in.  We have yet to find any mega-bulls out there.  Mega-bears are prevalent everywhere.

We have zero expectations that the long-term numbers are even anywhere close to reality and we will be shocked if analysts act surprised if the company reduces them further.  So why do we bring this up?  This is still an IF… but if the company comes anywhere close to its numbers and so long as the company doesn’t guide numbers down further to the point that the business model is not a profitable one, then at $8.00 and some change should or should not just about all of the awful climate be priced in?

By the way, that all still assumes profitability.  If any of these big tech companies start to be unprofitable, well that is not priced in.

Jon C. Ogg
February 26, 2009