Since the company reported results on May 20, there have been a large number of estimate revisions made by the analysts covering the stock.
First Quarter Highlights
On May 20, 2010, Dell Inc. (DELL) reported first quarter 2011 results, with EPS of 30 cents exceeding the Zacks Consensus Estimate of 26 cents as well as 25 cents reported in the year-ago quarter, and 28 cents reported in the previous quarter.
The company reported revenue of $14.9 billion, up 21.0% from $12.3 billion reported in the year-ago quarter and almost flat compared to $14.9 billion reported in the previous quarter. The company’s first quarter revenue growth may be attributed to strength across all business segments, with maximum growth registered in the Large Enterprise segment which is again attributable to robust growth in server revenue.
Additionally, commercial customers have increased purchases of Dell’s open, capable and affordable enterprise solutions during the recently concluded quarter, contributing to the company’s revenue and shipment growth.
This apart, the company witnessed robust growth in the BRIC countries (Brazil, Russia, India and China), where sales increased strongly by around 60.0%, with revenue from India increasing 90.0% and that from Brazil increasing 81.0%. China reported revenue growth of 44.0%.
This apart, the company exited the quarter, with a strong cash and short-term investments balance of $10.9 billion, while its cash flow from operations declined to $238.0 million from $1.26 billion reported in the previous quarter. The decline in cash flow was on account of seasonality, since the consumer business dropped off sharply from the fourth quarter to the first.
Agreement of Analysts
Dell did not provide any numeric guidance for the second quarter, but is cautiously optimistic about improvement in corporate IT demand. This apart, the company continues to witness increased Commercial demand in the first quarter and is optimistic about the trend continuing throughout the year.
On the other hand, due to seasonal effect, the second and the first part of the third quarter generally witness slower demand from larger commercial customers in the U.S. and Europe. Therefore, the company expects low seasonal demand pickup in the second quarter.
Over the last 30 days, 12 of 30 analysts covering the stock have raised their estimates for the second quarter, while 5 analysts have made downward revisions. Moreover, analysts also revised their estimates for fiscal 2011, with 22 of 34 analysts raising estimates, with five making downward revisions over the last 30 days.
We believe that this two way movement in estimates happened as analysts are pleased with the EPS and revenue performance of the company, although estimates were negatively impacted as gross margin for the quarter came in below expectations of some analysts.
Irrespective of a favorable enterprise mix which gives a feeling that Dell has been worse hit by the rising component costs than Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ). This has happened as many believe that Dell has a less diverse business model and thus has less room to maneuver.
On the positive side, major companies are slowly increasing their IT spending. Reinforcing this fact is the recent data from technology research firm Gartner, which has raised its 2010 PC shipment forecast, and expects global PC shipments to rise 22.0% this year, up from its March forecast of 20.0%, attributable to strong consumer demand and companies replacing aging computers.
The research firm expects worldwide PC shipments at 376.6 million units in 2010, compared with 366.1 million units forecasted in the March quarter and 308.3 million units last year. Global PC spending is forecasted to increase 12.0% to $245.4 billion in 2010. We consider the move a positive for Dell, since we believe that the company has the ability to grab a substantial share of the increase in PC shipment along with the increase in IT spending through new, innovative products and aggressive marketing.
Magnitude
The third quarter Zacks Consensus Estimate has moved up to 30 cents, just a penny above the EPS estimated 30 days ago. For fiscal year 2011, the Zacks Consensus Estimate has moved up to $1.26, up 3 cents estimated 30 days ago.
Our Recommendation
New products, a stronger services business, opportunities in the Electronic Medical Record sector, the smart phone initiative and a revival in IT spending are positive factors. The acquisition of Perot Systems is also positive, since it expanded the customer base and opened up cross-selling opportunities. Although the gross margin was not so impressive and high debt level may increase the interest payout for the company.
This apart, we are a tad apprehensive about its mediocre performance in the mobile/consumer segments of the PC market, where growth prospects are very bright. We are reiterating our Neutral rating on Dell.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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