(Updated from 10:55 a.m. ET)
, after taking a year off from the personal computer makers, reassumed coverage of the group with a splash, initiating coverage of four names with bullish ratings. Analyst Joe Moore started coverage of
, but Dell, which was added to the U.S. recommended for purchase list, was the pick of the litter. The other three were given a lower market outperform rating.
Also this morning,
analyst Steve Fortuna placed Dell on its focus one list for many of the same reasons, specifically pointing to its high-end WinTel servers as a strong point. Dell recently claimed the top spot in the server market, coming in with domestic market share of 26.4%, beating No. 2 Compaq's 24.4% share of the market. Fortuna has a $32 price target on the stock.
Moore also set a 12-month price target of $32 on Dell, which is up 49% for the year to date as of yesterday's close and was lately up 4.1% to $27.03. In the analyst's view, Dell will be able to save money while gaining market share in a declining economic environment. Moore maintained that while competitors struggle to control costs and inventory while slashing prices and seeing their margins lowered, Dell's method of selling computers directly to customers enables the company to save money while keeping the storeroom floor clean and margins strong.
When times are tough, Dell's business model translates directly into increased market share, Moore wrote in a research note. "In the April quarter, the company gained two-and-a-half points of global market share year-over-year," he wrote this morning. "This was the biggest year-over-year gain in share since the September 1998 quarter, another period of severe component price declines."
Meanwhile, Moore said that times are getting tougher for Dell's competitors, pointing out that Dell was the only one of the top five computer vendors to record a profit in PC hardware. Apple was also profitable from the hardware side, but Moore considers the company a niche seller. With Compaq and
focused more on clearing out inventory, Moore said that Dell will continue to gain market share.
Moore assumed coverage of the PC makers from Rick Schutte, who left Goldman nearly a year ago to manage money for Gateway founder Ted Waitt. Previously, Moore worked with Nathaniel Cohn, covering semiconductors.
"There is no doubt that Dell is putting pressure on its competitors in a way a low-cost producer in a commodity industry typically does," Moore wrote. He also indicated that the company has solid operating margins, strong cash flow and a level of return on invested capital that he termed "absurdly high."
But short sellers and other sell-side analysts feel that issuing strong buy ratings sends the wrong message to investors, who are all too eager to return to the mania of early 2000. Many point out, Moore included, that Dell faces some serious risks even if it is a front-runner in the PC space. Visibility is still poor, pricing is difficult, price-to-fiscal 2001 earnings ratios are quite high and a recovery in 2002 isn't a given. Moore said he likes the risk/reward profile of the company, but added that if a negative scenario were to play out, his 2003 estimate could be too high by 15 cents to 20 cents.
"The fact of the matter is that Dell is better at making PCs than the rest of the guys, and so they are making life difficult for everyone else, and at the end of the day they will be a big winner," said Bill Fleckenstein, president of
, agreeing with the points made by both Goldman and Merrill. But Fleckenstein, a short seller, differs in his conclusion, saying that Goldman and Merrill are making a "distinction without a difference" in highlighting Dell over its competition. "You're buying a TV manufacturer in the middle of a price war," he said. "There's no barrier to entry, and that's not a good business any more than making a TV is a good business. Dell is not worth what it sells for even though they're good what they do."
Fleckenstein isn't short Dell, but he does have a short position in Gateway. He said that he can't really do much to short stocks in the current environment, comparing the current state of tech to last year's dot-com mania. "When stuff like that passes for knowledge, how can I fight them?" he asked. "If a million people believe the same stupid thing -- you can get trampled. I'd like to see them take it up to $30 and then I'll have a great chance to short it."
Joe Beaulieu, an analyst with
, said he was "a little concerned" about valuations. "Right now the PC industry is really unattractive," he said. "Clearly the PC is not going away, but Dell is on the war path, slashing prices, doing a great job, but in a way I think they're giving away too much. I don't think the valuation is terrible, but I don't see it as a table-pounder either."
Beaulieu, whose firm issues no ratings and does no banking, said Dell is well-positioned in the PC market, but he's more skeptical of the company's efforts in the enterprise sphere as a catalyst for growth. And in the current environment, the analyst said he doesn't see that much upside to the stock, which has a 52-week high of $54.67.
"I just don't think the stock looks nearly as attractive as it did a few months ago when it was below $20," he said. "However, once there are good signs of a recovery, it's too late to get in the stock. But the valuation isn't there for me,
and $27 is just too steep. I like the stock in the low $20s."