A string of unheralded 2012 acquisitions -- to go with three years of M&A in software and data security markets -- is helping Dell distance itself from peers and from its bread-and-butter PC business, positioning the company for improving operating margins and earnings per share. That comes as analysts expect long-term profitability declines in its core PC business.
Wall Street increasingly likes what it sees in the Dell M&A strategy.
On Monday, Morgan Stanley analyst Katy Huberty upgraded Dell's shares to "equal weight" from "underweight," on expectations that the company's recent acquisitions will help it generate earnings that are in line with the tech sector, rather than underperforming peer PC makers like Hewlett Packard (HPQ). Now Dell can be expected to show similar performance to tech giants like IBM (IBM), EMC (EMC), NetApp (NTAP) and Seagate Technologies (STX).In the past six months, Dell's shares have gained just over 1% to $16.38, a stronger return than Hewlett Packard, which has experienced a near-10% drop. Tech companies geared to networking, data security and virtualization, like IBM, EMC and Seagate Technologies, have posted double digit stock gains. "[Our] more positive view is a function of both potential EPS upside and the recent acceleration in acquisitions which show the company is taking action to address its past market underperformance and high exposure to secular pressures in the consumer/PC business," wrote Huberty in a note to clients. Through acquisitions over the last three years, Dell has added $4 billion in revenue from higher margin and faster growing businesses outside of the company's PC and server operations, which still account for roughly two-thirds of overall sales. In 2012, Dell's M&A pace has quickened, with the company adding $600 million in new non-PC sales in a flurry of deals. "Over the next several years, these acquisitions could drive Dell toward our bull case 9%+ operating margin and $2.70 EPS," says Huberty. While Dell has been reluctant to disclose the price of recent acquisitions, including data protection specialist SonicWall, virtualization software maker Wyse Technology and AppAssure Software, a maker of backup protection software for cloud infrastructure -- the deals push Dell into markets that are expected to yield higher growth and profit margins than PCs and servers. In the U.S., PC sales fell nearly 5% in 2011, according to research firm IDC. Meanwhile Dell, the world's third largest PC maker, expects its computer sales to fall 7% in the first quarter. Acquisitions give Dell the potential to improve gross margins by over 20% and operating margins by 9%, even if PC margins fall as much as 5% annually over the next few years, adds Huberty. While storage, networking and services businesses will be the drivers, Dell will still be challenged to grow its overall revenue, which grew less than 1% to $62 billion in 2011.
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