"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

22 November 2006

Absurd Dell "Results" Boost Futures

Dell's reported results of $577m profit and $0.30 in EPS versus a "$0.24" consensus suggests the absurdity of this market. Obligatory "upgrade" by some shill firm and futes goosed. Just a few details -there are actually only a few since the Q3 SEC filing (10Q is delayed....)

Stock Futures Up After Dell Earnings; Light Trading Expected Ahead of Thanksgiving Holiday

LONDON (AP) -- U.S. stock futures notched higher Wednesday on the back of Dell Inc.'s upbeat earnings figures, though trading is likely to be muted as some traders leave early for Thanksgiving...Of companies in focus, Dell Inc. shares jumped 8.5 percent in early Frankfurt trading after it said its quarterly profit rose nearly 12 percent. Though revenue didn't rise as quickly as analysts had forecast, its rise in earnings suggest the company is making progress in growing margins. The news earned Dell an upgrade to outperform by Bear Stearns.

But here's the whammy:
Prudential thinks the story has just begun and believe that Dell only partially benefited from its key margin drivers in the OctQ - 1) stable PC pricing and a richer product mix, 2) server/storage product cycles, 3) reduced component costs, and 4) services expansion. Firm expects to see more margin leverage in coming quarters as these initiatives to improve profitability gain traction. What's new here? Nothing but wishful thinking- stable prices? an AMD -driven server cycle? Lower component costs? (not for quad processors)

They are modeling Dell to increase operating margin by another 100 bps over the next 2-3 quarters, and then turn further cost reductions into more aggressive pricing to win share.
Another hail Mary pass on this one- aggressive pricing is the Walmart/Dell way

Firm continues to believe Dell has the best chance in their universe to post upside to consensus estimates over the next several quarters. They are increasing their street high FY08 EPS estimate by $0.11 to $1.61, and are raising price target to $31 fr0m $28. How is a 20x multiple justified for a company growing revenues 3% for a cyclical business in a global economy about to enter a recession?

In a break from its normal practice, Dell did not provide year ago results in its report. It also didn't offer the usual post-earnings conference calls, where reporters and analysts could directly question founder Michael Dell and Chief Executive Officer Kevin Rollins. Dell stressed the preliminary nature of the earnings, saying the results could change due to a Securities and Exchange Commission probe that has grown since it was first announced in August. Dell also included warnings about the uncertain outcome of the investigations that could show "a material weakness in the company's internal controls over financial reporting." Oh, and the numbers are meaningless in any event.


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