In the 1990’s, there weren’t many stocks that outperformed Dell (DELL). It returned close to an unfathomable 100,000% throughout that decade and it was the envy of all other companies. So many Dell employees were getting rich that a new term was coined to descibe them: Dellionaires. Even lower level employees were retiring by cashing in on their soaring stock options. Fast forward to the present day. My, how times have changed.
Today, the company is in disarray and seems to be grasping at straws. It used to be the king of the made-to-order model of selling computers which gave them a huge cost advantage over its competitors, but those days are long gone. Computers have gone from fairly differentiated products to complete commodities these days. Dell has not found a reliable business in which it can dominate like it did with the desktop.
Winner’s Curse?
Its takeover battle with Hewlett Packard (HPQ) over 3Par (PAR) is the latest example of management folly. As of this writing HP has the upper hand in getting the company by offering $30 per share. If Dell were to come over the top of this offer, I think it would be a mistake and Dell would be saddled with the “winner’s curse.” This is where a company wins a takeover battle but overpays to do so and in turn hurts shareholders by diluting them. 3Par is a solid asset but at this point it isn’t worth what the two suitors are willing to pay.
Dell reported a decent July quarter, but investors were disappointed with the company’s weak gross margins. Basically its components were more expensive than analysts feared, which crimped its profitability. With the weak economy, corporate IT spending is not where it should be as companies are cautious about making new investments in technology. A rebound in this area could get the stock moving again, but this doesn’t seem to be on the horizon.
To add insult to injury, director William Gray III sold over 27,000 shares of Dell in early August at around $11.86 per share. The stock is barely above that print, but this sale of shares by an insider near the lows doesn’t inspire confidence to the rest of us.
The stock isn’t expensive based on current-year estimates. It is trading at 9.3x this year’s estimates of $1.29. Normally, I would consider the shares cheap, but I don’t see many upside catalysts at the moment. I wouldn’t recommend shorting it at these levels, but there are much better places to put your money now.
Dell: Still Not a Buy is an article from: 
