“Let’s look at these numbers because this is a bit of a surprise for this company to report just before, as you said, it took all of us off guard, but let’s get right to these numbers because that 24 cents a share that Dell is reporting does include pretax expenses of $87 million, or about 4 cents per share for “organizational effectiveness” actions. Of course we’ll get more directions and color on exactly what that means. But that 24 cents in fact does beat by a penny the 23-cent also on better than expected revenue.” — CNBC’s Closing Bell 8/27/2009
Dell (DELL) was one of the final big tech companies to report in this earnings season and they weren’t able to keep the results to themselves. The stock had a notable surge about 20 
minutes prior to the market’s close which caught the attention of many traders awaiting the tech bellwether’s results. CNBC’s Guy Adami tweeted that there were rumors on the floor that Dell had accidentally leaked their EPS results early. At this point, we are able to confirm this as the CFO admitted Dell IR posted the results to their website too early, and Dell stock soared from just a shade below even to up nearly 7% at the close. The major business television networks released the news on Dell’s earnings beat about five minutes prior to the close, and you can tell from the quote above that they were caught off guard.
The actual results were a little better than expected with EPS of 24 cents versus expectations of 23 cents (its the second straight quarter with the same result; EPS of 24 versus estimate of 23). Also, revenue came in at $12.8 billion edging out expectations for $12.6 billion. Clearly there has been quite a bit of improvement priced in as Dell closed the day nearly twice its March lows. However, the frenzy that accompanied the early release and rumors surrounding it sent the stock spiking higher. In after hours trading the stock started to fall back down to reality ever so slightly. However, the rally in Dell shares continued after the brief respite, as their CEO Michael Dell discussed better projections for revenue for the balance of the year.
The reality is that earnings have fallen 23% from a year ago, as business IT spending remains a challenge for Dell. Dell normally counts on business spending for about 80% of its revenue. That being said, shipments rose 10% sequentially which was served as evidence of a stabilization. Any thawing in corporate IT budgets would be a welcome change. In the mean time, Dell is actively trying to streamline operations and cut up to $4 billion in costs over the next two years. These costs cuts are paying off as Dell was able to lift gross margins to 18.7% from 17.2% last year. With the success of Dell’s mini netbooks, which are less profitable than more powerful computers, the surge in margins was certainly a pleasant surprise.
Ockham continues to have a very positive stance on the valuation of Dell, even though we have recently downgraded to Undervalued from Greatly Undervalued recently. As you can see from our ratings history chart, we have been positive on Dell for quite some time. The stock continue to trade well below the historically normal ranges of price-to-cash earnings and price-to-sales metrics. They were able to beat expectations on the top and bottom lines, which is an encouraging sign. Furthermore, the release of Microsoft’s (MSFT) Windows 7 could help boost sales this fall and winter. We expect corporate cost cutting will remain a problem for Dell’s enterprise business; however, at this price we believe that there is still a lot of value in this company.
