Earnings Preview: Dell

Earnings Preview: Dell (DELL)

Overview
·    Dell (DELL) is slated to report 1Q 2011 earnings after the closing bell on Thursday, May 20. A conference call will follow the release at 5:00 p.m. EST. Actual results are usually available through Business Wire between 4:00 – 4:05 p.m. EST.

Outliers & Strategy
·    Several technology heavyweights have checked in with stronger than expected earnings reports this quarter, including Intel (INTC), Cisco Systems (CSCO), and Apple (AAPL). Solid results from Intel imply Dell should benefit from improving consumer demand.
·    Dell is expected to earn $0.27 per share on revenue of $14.269 billion. The high number on the Street is $0.31. This would be viewed as positive considering the “cautiously optimistic” outlook the company provided in the previous quarter.
·    Results on Tuesday, May 18 from Hewlett Packard (HPQ) could help set the stage for Dell’s results on Thursday. HP is widely expected to report earnings that reflect improved consumer demand.  Historically, HP manages to deliver results comfortably ahead of analyst forecasts, while Dell tends to report numbers more in-line with consensus.
·    Following the recent sell-off, Dell now trades for just 10.3x expected forward earnings, versus HP, which fetches 13.9x earnings.
·    Last quarter, Dell reported a “Non-GAAP” earnings per share figure. In previous quarters, Dell provided a “net” EPS figure that impacted the bottom line. In its past release, Dell explained Non-GAAP financial information excludes costs related primarily to the amortization of purchased intangibles, severance and facility-action costs, and acquisition-related charges.

Recent News
·    February 18: Dell saw demand in the important commercial business continuing to return during the fourth quarter and is cautiously optimistic that this trend will continue into fiscal-year 2011.
·    February 24: SVP & CFO Brian Gladden told attendees at the Goldman Sachs Technology Conference that disappointing results in the consumer segment were a drag in 4Q 2010. However, consumers only account for 20% of Dell’s business, versus 80% in commercial where demand was improving.
·    May 3: Barron’s reported Dell shares could slip, due to rising restructuring costs and appears fully valued at current levels. The publication noted that UBS had recently downgraded the shares (4/28), citing the conflicts between the PC business and new initiatives. Similarly, Analyst Bill Shope of Credit Suisse reportedly believes the shares are worth $12.50, according to the Barron’s article.
·    Dell shares are off more than 14% since peaking in mid April.

Summary
Dell is coming off a fairly weak quarter, due to concerns over competition, weakness in the consumer segment, and restructuring costs. However, the recent pullback suggests the market may be factoring in these risks, making Dell ripe for a move higher if results come in sufficiently above consensus forecasts.