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Dell Inc. - still a growth company?

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Title: Dell Inc. - still a growth company?


1
Dell Inc. - still a growth company?
  • Stefan Eisner December 1, 2005

2
Outline
  • Company Facts
  • Portfolio Position
  • Business Strategy key tenets
  • Segmentation by product geographical
  • Industry current developments
  • Stock Facts
  • Valuation
  • Recommendation

3
History
  • Michael Dell founds Dell Computer
    Corporation simple concept selling computer
    systems directly to customers
  • 1987 International expansion -gt opening of
    subsidary in UK
  • 1988 IPO (3.5m shares at 8,50 each)
  • 1989 Company introduces first notebook computer
  • Opened manufacturing center in Limerick,
    Irland -gt serve European, Middle Eastern and
    African Markets
  • 1993 Joins ranks of the top-5 computer system
    makers worldwide
  • 1997 Dell introduces its first workstation
    systems
  • 1998 Dell introduces its PowerVault storage
    products
  • 2000 Company sales via Internet reach 50 million
    per day
  • 2001 For the first time, Dell ranks No. 1 in
    global market share
  • 2003 Dell enters consumer electronics

4
Company Facts
  • Headquarter Round Rock, Texas
  • Chairman of the Board Michael Dell
  • CEO, President Kevin B. Rollins
  • Revenues last four quarters 54,182m
  • Net Income last four quarters 3,565m
  • Broad range of products services
  • Enterprise systems (servers, storage,
    workstations, networking products)
  • Client systems (notebook, desktop computer
    systems)
  • Printing and imaging systems, software and
    peripherals and global services
  • Employees 63,700
  • Financial Year End January

5
Portfolio Position
  • Bought 500 shares at 41.75 on 12/10/99
  • Cost of position 20,875.00
  • Closing price 11/30/05 30.151
  • Value of position 15,075.50
  • Change -5,799.50 (-27.78)
  • Reviewed on December 2002 and November 2004
    (Hold)
  • of Portfolio 5.31
  • Jack Henry and Macrovision are also in the
    Technology Sector

6
Business Strategy key tenets (I)
  • Direct relationship is the most efficent way to
    the customer
  • Dells direct business model eliminates
    wholesale and retail dealers
  • No expenditures associated with the retail
    channel
  • constant flow of information about customers
    plans and requirements
  • enable Dell to continually refine its product
    offerings
  • Custom-built products and custom-tailored
    services
  • Build-to-order manufacturing process
  • Turn over inventory every 4 days on average and
    reduce inventory levels
  • Rapidly introduce the latest relevant technology
  • Rapidly pass on component cost savings directly
    to customers

7
Business Strategy key tenets (II)
  • Low-cost leader
  • Efficient supply chain management and
    manufacturing organization
  • Concentration on standards-based technologies
  • Direct business model
  • Pass those savings to its customers
  • A single point of accountability for its
    customers
  • Offers an array of services
  • Standards-based technologies deliver the best
    value to customers
  • Provide customers with flexibility and choice
  • Benefit of extensive research and development

8
Sales Marketing
  • Channels of Distribution
  • Sales representatives
  • Telephone-based sales
  • Online sales through www.dell.com
  • Marketing programs for specific customer groups
  • Large business institutional customers
  • Field sales force, account teams (system
    engineers and consultants)
  • Small-to-medium business consumers
  • Advertising on television, Internet, print media
    and by mailing publications
  • Dell Direct Stores view Dell products in person
    and purchase with assistance
  • Goverment, healthcare and education market
  • Specific sales and marketing programs

9
Manufacturing, Materials Supply RD
  • Manufacturing
  • Build-to-order manufacturing process
  • Process consists of assembly, software
    installation, functional testing and quality
    control
  • Locations US(3), Brazil, Ireland, Malaysia,
    China
  • Materials Supply
  • Large number of suppliers
  • BUT Intel Corporation as a sole source supplier
    of processors and Microsoft sole source supplier
    for various operating systems and application
    software products
  • RD
  • Very low expenses 464m for fiscal 2005 (0.94
    of Revenue)
  • HP (4.3), IBM (5.9), Sun (16.3)
  • Company uses partners (e.g. Intel, Microsoft,
    EMC, Lexmark) to develop technology

10
Segmentation by product services categories
  • Beginning Q1-FY06 supplemental revenue reporting
    by product services
  • Q3-FY 06 (total revenue 13.9 billion)
  • Desktop PCs still most important, but
    decreasing

11
Segmentation by product services categories
  • Beginning Q1-FY06 supplemental revenue reporting
    by product services
  • Q3-FY 06 (total revenue 13.9 billion)
  • Desktop PCs still most important, but
    decreasing

12
Geographical Segmentation
13
Geographical Segmentation
14
Dells Market Share PCs
Based upon IDC Worldwide Quarterly PC Tracker
15
Industry current developments (source report
Mintel cooperation)
  • Demand for Mobility
  • First time in April 2005 laptop sales surpassed
    desktop sales
  • Increasing broadbrand penetration
  • Consumer use their computer more and more for
    multimedia activities
  • Declining Prices
  • Increasing number of units shipped, but declining
    overall revenues
  • Average computer prices fell nearly 35 between
    2000 and 2005
  • Prices have continued to fall, especially laptop
    prices
  • Low Cost defining aspect of competition
  • Most important advertising in newspapers
    circulars
  • Chinese imports continue to grow
  • leading computer equipment importer to the U.S.
  • From 11.9 billion (2002) to 29.5 billion (2004)
    147.9
  • Lenovo, a chinese company, bought IBMs PC
    division in early 2005
  • Municipal wireless infrastructure drives notebook
    sales
  • 100 cities implementing wireless infrastructure
  • 1000/- cities working on plans for wireless
    Internet networks

16
Industry US Home Computer market forecast
17
Share Buyback
  • YTD have repurchased 138 million shares
  • More than 3x the stock options Dell expect
    to grant for the full year
  • Plan to spend at least 1.7 billion in Q4
  • Will continue in the future, because Dell
    has a high Free Cash Flow, but very few
    investment opportunities
  • OR Dell will start to pay dividends


18
SWOT a overview
S
W
  • Leading market position
  • Notable clientele (large companies, state
    goverments)
  • Superior business model
  • Strong operating performance
  • Cash Cow
  • No traditional pension plans
  • Partnership with Microsoft (creating single tool
    managing hardware and software)
  • Single source suppliers
  • Low RD spending
  • Poor customer service
  • Problems in China
  • INDUSTRY
  • Growth in the digital color printer maket
  • Sale of IBMs PC Business to Lenovo (Europe/US)
  • Trend to more modular, standard products and
    clusters of less expensive machines
    (serverstorage)
  • COMPANY
  • Printer Replacement business
  • Expansion of product portfolio (consumer
    electronics)
  • International Expansion
  • Entering new markets through partnership
  • INDUSTRY
  • Decreasing PC prices
  • Desktops revenues will decrease heaviley until
    2010
  • Porters five forces - High Industry Rivalry
    - High Bargaining Power of Buyer
  • New CEO at HP -gt cost reducing
  • Sale of IBMs PC Business to Lenovo (Asia)
  • Asian No-Name producer
  • Increasing component prices

O
T
19
Competitors















20
Stock Facts
  • Share price 30.15 (52-Week range 28.62-42.57)
  • Market cap 72.29B
  • Trailing P/E 23.32
  • Forward P/E (fye 28-Jan-07)16.94
  • Dell has never paid a dividend
  • Sector Technology
  • Industry Personal Computers
  • held by Insiders 9.85
  • held by Institutions 65.5
  • Ticker DELL

Source Yahoo!Finance 11/30/05
21
Stock Performance last 5 years
22
Stock Performance last 2 years vs Competitors
Vs Hewlett Packard, IBM, Gateway
23
Valuation - Beta
24
Valuation 3 Scenarios
  • Verification of Forecast and Assumptions of
    Segments by
  • Calculating ratios
  • Computing Implied Growth rates of Geographical
    segments
  • Reviewing sales development

25
Valuation sensitivity analysis (normal)
26
RECOMMENDATION - Considerations
HOLD largest geographical segment (American Business Units) growing and operating margin increases Growth opportunities outside the US Still superior business strategy Expansion to higher margin products (printer replacement, storageservers, business customer) Share buyback Almost no debt After the decrease in the stock price, lower growth rates are partially contained in the price SELL Other geographical segments only flat or negative Operating income growth Problems in China, UK Increasing rivalry by Asian companies pricewar desktops and mobility products, which are almost two thirds of the revenue no further investment opportunities No long term-guidance of the company historic high double digit growth rates are improbable
Source Yahoo!Finance 11/30/05
27
RECOMMENDATION - SELL
  • SELL the entire position of Dell shares (500)
  • DCF only slightly above actual share price
  • High level of uncertainty about Dell futures
  • Diversification of product portfolio and further
    expansion outside the US CAN be successful, but
    it MUST be successful to maintain high growth
    rates
  • No guidance of the company for next year
  • Still a growing company, but the high growth
    rates of the past are improbable
  • If we follow our investment approach, there are
    better companies to own

28
Question Comments
29
Desktop Products
  • Desktop Computers
  • Optiplex line corporate, institutional and small
    business customers
  • Dimension line small businesses and home users
  • Desktop Workstation
  • Precision Line professional users demand
    exceptional performance
  • Cash-cow/ mature business (especially in the US)
  • No. 1 Desktops Worldwide market share 18,7
    (Q2-CY05)

Q2 Growth-Rate 2 Unit Growth-Rate 17
30
Mobility
  • Notebook Computers (majority of revenues in this
    segment)
  • Latitude line addresses business
    organizational needs
  • Inspiron line small-medium sized businesses,
    individuals
  • No. 1 worldwide Market share 18,5 (Q2-CY05)
  • Mobile Workstation
  • Precision Line professional users demand
    exceptional performance
  • MP3-Player (DJs) PDA (Axims)
  • MP3-Player
  • Notebooks selling much faster than desktops

Q2 Growth-Rate 20 Unit Growth-Rate 47
31
Software Peripherals
  • Dell Branded
  • Printers, monitors, plasma and LCD television,
    projectors
  • Third party
  • Printers, software, digital camera and other
    products
  • Printing Imaging Systems
  • Dell started selling Printers in 2003
  • Majority of Printers are based on Lexmark
    Technology
  • Extremly aggresive prics for printers
  • build market share in the higher-margin toner
    replacement business (2/3 of HPs operating
    profit)
  • All printers feature Dell Ink/Toner management
    system software
  • Unit growth Year-over-year second quarter 77
    (No. 2 in the US)
  • Digital Home Entertainment Market
  • Diversification of Dell traditional markets
  • Sucess important for growth

Q2 Growth-Rate 35
32
Servers Networking
  • Servers (majority of revenues in this segment)
  • PowerEdge line industry standard servers (x86
    architecture)
  • No. 2 worldwide Market share 27.8 (Q2-CY05)
  • Networking Products
  • PowerConnect switches
  • Competitive prices to create additional sales of
  • storage products
  • Higher margin enhanced services

Q2 Growth-Rate 9 Unit Growth-Rate 25
33
Enhanced Services
  • Managed Services
  • IT management services
  • Professional Services
  • Help business utilize emerging technology
  • Deployment Services
  • Configure and deploy Dell systems and products
    into IT environment
  • Support Services
  • Varietey of customized services and support
    programs e.g. warranty upgrades and services
  • Training and Certification Services
  • Online training programs and IT certification

Q2 Growth-Rate 41
34
Storage
  • Strategic allicance with EMC
  • Dell/EMC storage products
  • 2001 5-year alliance 2003 extended for
    additional 2 years
  • Own line
  • Dell PowerVault
  • Products
  • External storage, tape backup products, network
    attached storage, fibre channel array, storage
    area networks and rack solutions

Q2 Growth-Rate 26
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