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Dell's Not Ready for the Scrap Yard

(Updated with fresh stock quote)

Dell's (DELL) analyst day may not have delivered the warm afterglow investors were hoping for, but the tech bellwether could still offer plenty of upside, even in a difficult economy.

Dell shares fell after the Round Rock, Texas-based firm Tuesday after the firm forecast a decline in its gross margins and warned that IT spending will not rebound until 2010.

After months of economic doom and gloom, this was hardly music to the ears of investors desperate for good news. Dell, like IBM (IBM - Get Report) and Intel (INTC - Get Report), is a key indicator of the health of the tech sector, and, as a major PC maker, is a good barometer for consumer confidence.

Dell's Day of Reckoning

At least one analyst, however, feels that Dell's vital signs are plenty strong and described Tuesday's selloff as an over-reaction that could ultimately benefit shrewd investors.

"Specifically, we quantify the impact from lower gross margin as only a small 1 cent to 2 cents hit to EPS in the July quarter," wrote David Bailey, an analyst at Goldman Sachs, in a note released Tuesday. "We are reiterating our 'Buy' rating and view the undue selling post the analyst day as an attractive entry point."

Dell's shares rallied slightly Wednesday, rising 34 cents, or 0.58%, to $12.04, as the Nasdaq gained 2.49%. Despite rising steadily since March, the company's stock is trading well below its 52-week high of $26.04. This time last year, for example, Dell shares were changing hands for more than $22.

Even Dell's margin pressures should eventually approve, according to Bailey.

"Although firming component costs caught Dell by surprise in the second quarter, the company should have more time to adjust pricing in the third quarter to mitigate the pressure on margins," he said. "Seasonally better demand, a higher mix of revenue from large enterprise and SMB customers, and higher volumes from a corporate upgrade cycle likely in 2010 should drive improved margins."

Not all analysts, however, are as bullish on Dell in the aftermath of its analyst day.

"We would wait to buy shares of Dell due mostly to macro-economic headwinds and uncertainty concerning the timing, magnitude of a PC/client replacement cycle," wrote Jayson Noland, an analyst at R.W. Baird, in a note released Wednesday. The analyst maintained his 'neutral' rating for Dell, but admitted that the firm's valuation is attractive at its current levels.
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