Citigroup Raises Dell to Buy

Dell's(DELL - Cramer's Take - Stockpickr) second-quarter earnings warning was "self inflicted" and represented pricing problems that should be fixed by next quarter, Citigroup said in upgrading the stock to buy Monday.

Citi raised Dell from neutral while simultaneously dropping its price target to $24 from $28. The new target represents a multiple of 16 applied to expected earnings of $1.48 for the year ending in the third quarter of 2009.

On Friday, Dell shares slid 10% to $19.91 after the company cut its second-quarter earnings outlook by roughly one-third due to competition in the commercial market.

"While slowing growth does not generally contribute to benign industry pricing, we believe that a significant portion of Dell's second-quarter gross margin shortfall is self inflicted," Citigroup wrote. "In other words, the company was too aggressive on price in what has turned out to be a relatively price inelastic commercial PC market."

"The good news is we believe Dell can raise pricing back to levels consistent with 16.5% gross and 5.5% operating margin in the third quarter and beyond without significantly negatively impacting revenue, and we believe that this is the company's intention," Citi wrote.

The brokerage cited a number of other third-quarter catalysts, including the introduction of Advanced Micro(AMD - Cramer's Take - Stockpickr) chips and an Intel(INTC - Cramer's Take - Stockpickr) processor upgrade.

In early trading, Dell added 62 cents, or 3.1%, to $20.53.