Tuesday, April 26, 2011

Dell: Beyond the PC

Michael Dell founded Dell (DELL) back in 1984 and maintains a sizable stake in the company. Late last year, he bought slightly more than $ 100,000,000 of the company's stock at $ 13.57/share. In addition, in March of this year he purchased an additional $ 150,000,000 between $ 14.21 and $ 14.42/share.

Those purchases still seem like real money even for someone with a large sum already invested in the company.

The stock closed at $ 15.38 yesterday giving it an enterprise value of $ 21.7 billion ($ 30 billion market capitalization minus $ 8.3 billion in net cash).

In a recent Wall Street Journal interview he pointed out:

- Two-thirds of Dell's profit is non-PC
- Most of what is PC is not consumer

So Dell's not really a consumer PC company though some seem to still see it that way.

Last year, Dell had net income of $ 2.6 billion. This is a more conservative number than the non-GAAP number of $ 3.1 billion that the company reported.

Free cash flow (GAAP Net Income + Depreciation - CapEx) for the company was nearly $ 3.2 billion.  In this case, those healthy free cash flows seem to support the idea that the non-GAAP earnings may be a better reflection of Dell's earning power. Many reported non-GAAP numbers are just a way to provide a slightly optimistic view (a.k.a.: BS).

Either way the company looks not expensive.With Dell expected to have non-GAAP net income of ~$3.3 billion this year the enterprise value to earnings stands at 6.5x. The multiple is more like 7.6x if the more conservative GAAP net income is used.

I'm guessing what seems now "cheap" will just get even cheaper before it is all sorted out among the longer term investors and those more focused on price action. I've said before that there's just no technology business I'm comfortable with as a long-term investment. Occasionally, some have sold at enough of a discount to be worth the trouble, but they will always remain very small positions. Most are involved in exciting, dynamic, and highly competitive industries.

That's precisely what makes them unattractive long-term investments.

Adam

Established a small long position in DELL at lower prices
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