Dell Second Quarter Results Offer Some Optimism, Analyst Says

Dell will announce its second-quarter results for fiscal year 2010 after the markets close on Aug. 27, and equity research firm Broadpoint AmTech is optimistic about the message it will have for investors.
Broadpoint analyst Dinesh Moorjani released a research note on Aug. 24, upgrading Dell’s stock for the second time this year.
“We are now more optimistic on the PC demand outlook and believe the downward mix shift [in PCs] has played out for the most part,” wrote Moorjani.
Broadpoint now expects PC unit shipments to increase 12 percent year-over-year in calendar year 2010 – up from its previous estimates of 10 percent – and for Dell to announce revenue increases of 2 percent quarter-to-quarter to $12.57 billion, followed by an October-quarter revenue of $12.83 billion, with gross margins essentially staying flat, at 17.8 percent.
“Though Dell has outperformed in recent months … it has been a significant underperformer over the past 12 months,” writes Moorjani. “We expect Dell to outperform its peers over the next 12 months, given higher transaction revenue, higher calendar year 2010 EPS growth and exposure to corporate PCs.”
Moorjani notes that while many believe Microsoft’s Windows 7 won’t be a big catalyst for hardware upgrades, since it requires less processing power than Vista, many enterprises are still running Windows XP – not Vista – and so Windows 7 should have an impact.
Other potential areas of growth for Dell are said to be the server market, which is being helped by Intel’s Nehalem processors – “Corporations cannot defer IT purchases forever,” writes Moorjani – and also infrastructure services. Highlighting Dell’s room for growth, competitor Hewlett-Packard had an operating margin of 15.2 percent for services in the July quarter, versus Dell’s 4.9 percent.
“Dell recognizes that it has a significant corporate customer base that it can leverage,” writes Moorjani, “and that services is the next logical step to drive growth.”
In reviewing Dell, Moorjani expects the “bulls” to note Dell’s new hardware and operating systems, which corporations may upgrade to; Dell’s likelihood of reducing costs by $4 billion by the end of fiscal year 2011; and the opportunity for new growth that was created by its recent entry into the China consumer handset market.
The “bears,” conversely, will point to the possibility of netbook growth continuing to bite into PC sales; Dell’s “overweight exposure” to PCs creating an uncertain model; and enterprises continuing to put off IT spending.
On July 16, competitor IBM announced second quarter 2009 revenue of $23.3 billion, which was down 13 percent from a year earlier. On Aug. 18, Hewlett-Packard announced third quarter 2009 revenue of $27.5 billion, which was down 2 percent from a year ago.