(Updated from 8:26 a.m. ET)

After meeting with


(DELL) - Get Report

management for much of last week and this week,

Morgan Stanley Dean Witter

analyst Gillian Munson upgraded Dell shares to market outperform from neutral this morning, telling investors that the company's decision to hack at prices and slash at competitors' margins will ultimately prove successful.

Munson now thinks her 2002 earning estimates are too low and bumped them up to 94 cents a share from 90 cents a share on revenue of $38.5 billion, a 17% gain year-over-year. That's well above analyst consensus -- currently 88 cents a share for 2002 on revenue of $37.2 billion. Dell's price target was pegged at $33, a mark it hasn't closed above since Sep. 28, 2000. That target is 31% higher than its close of $25.26 yesterday.

The stock edged up 15 cents, or 0.6%, to 25.41 in morning trading.

"We now think there's a lot more meat on the bones regarding Dell's strategy than we have heard in the past. It may be that we have been less willing to listen until now, given the timing of what could be a recovery in the U.S. economy," she wrote. "Our simple call would be that a clear strategy is a powerful thing for an organization like Dell, and we think that the strategy is getting a lot clearer."

This means that Dell is the best of the worst, since the PC market is currently engaged in a brutal price war where profit margins are shrinking, inventory levels remain sky-high and demand is waning. Munson said "a long, hot summer" is in store for PC makers and "would not necessarily chase this stock."

According to the analyst, Dell's price-slashing ways won't stop anytime soon, expected to continue well into 2002. And that means Dell won't be posting upside earnings per share for the rest of the year, in Munson's view. "We don't expect a lot of upside in the calendar second and third quarters, as Dell argued that these will be slow quarters, but we think much of this may be built in," she wrote.

But on a list of things that the analyst does like about Dell, aside from the rapidly deteriorating PC market, is the share gains the company has posted in its enterprise server market, where it recently topped rival Compaq in the NT market. Munson highlighted this on Friday in a report to investors, but opted to keep her neutral rating on the company due to valuation. At the time of writing that note Dell was at $25.26, 43 cents lower than where it was as of her upgrade today.

How can one choose not to upgrade a company based on valuation, then upgrade it four days later when the share price is higher?

Munson changed the way she looks at Dell. "From this perspective, we admit to being potentially early on the stock. With this upgrade, we are allowing for a higher valuation on Dell than we previously thought possible," she wrote. "We think now is the time to start buying the stock on dips."

The stock shed 66% last year, and is up 45% since the beginning of this year.