Fed Panic Rally Masking the Bad News at Dell

You'd think it would take an act of God to get a stock to rally 14% the day a prominent Wall Street analyst cut his earnings-growth forecast to about half the company's guidance. As it turned out, for Dell (DELL), an act of Greenspan was just as good.

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Why Did the Fed Cut Rates Today?

The Federal Reserve's emergency rate cut was fortuitously timed for the beleaguered PC stock, coming directly on the heels of a harsh note from Lehman Brothers analyst Dan Niles. Niles expects the information technology budgets at Fortune 500 companies to come in 3 to 5 percentage points below the 10% growth that International Data Corp. had forecast. That doesn't bode well for Dell, since the overwhelming majority of its sales come from the corporate PC market, where demand remains slack despite aggressive price-cutting.

Niles reduced Dell's fiscal 2002 revenue-growth estimate to 17% from 20%, which is where the company guided analysts down in November. Meanwhile, Dell said that earnings would see "slightly faster" growth than revenue in 2002. Niles took his estimate for 2002 earnings to $1 a share from $1.l0. That puts his estimate for earnings growth at 10%, about half Dell's guidance.

"My feeling is that margins are going to have a really tough time next year," Niles said. "The pricing environment is going to get really brutal."

More cuts could be on the way. Other analysts reached by TheStreet.com on Wednesday said they were currently reviewing their models. And, as TSC reported in December, Dell's wilting investment portfolio could also take its toll on the bottom line. Niles indicated that there's a good chance he'll take another 1 or 2 cents off Dell's earnings to account for the diminishing gains Dell is likely to realize from its investments, which include names like WebMD (HLTH) and Internet Capital Group (ICGE).

Dell is one of a large number of technology companies that have built vast holdings in the battered Internet sector. But Dell is also one of a very few whose investment gains have been built into analysts' earnings estimates. It was greater-than-expected investment gains that helped Dell meet its Wall Street's expectations last quarter.

"It's only a couple of cents," says Niles. "So it's not as huge an issue as the demand problem. But it's still something you've got to be aware of."

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