Great Expectations Nothing New for Dell

Dell (DELL) should have little trouble notching its financial goals for the October quarter, a performance that's come to be expected every three months by the investment community.

When the Round Rock, Texas-based company reports third-quarter results Thursday, analysts expect it to deliver on its guidance for earnings of 33 cents on $12.5 billion in revenue. Just meeting those targets would mean Dell posted some pretty impressive numbers, with year-on-year gains of 27% in EPS and 18% in sales.

The payoff for Dell's trustworthiness: Investors have bid up the stock 8% this year, compared with a rise of less than 2% in the Nasdaq.

While there's always the theoretical possibility Dell will stumble this time, it doesn't flub results often, having missed the consensus earnings estimate only once in the past five years.

For its third quarter, the PC and server giant is widely expected to get a boost from a quarterly dropoff in prices on components like flat panel displays, chips, graphics cards and hard-disk drives, noted Credit Suisse First Boston.

Dell also will be aided by relatively strong demand among its enterprise customers, offsetting dimming growth on the consumer side. Corporate PC unit sales rose as much as 13% year-on-year in the third quarter, compared with feebler consumer PC growth of around 7%.

Indeed, sales to businesses accounted for an estimated 85% of Dell's revenue, estimated CSFB.

Comments from IBM ( IBM), as well as chip suppliers Xilinx ( XLNX) and Altera ( ALTR), likewise indicate a fairly robust corporate appetite for PCs and servers.

But slowing growth in the consumer market could still crimp future revenue. Most analysts believe PC unit sales growth will ebb in 2005, especially in the U.S.; Sanford Bernstein analyst Toni Sacconaghi thinks the trend could prompt cuts in Dell's earnings estimates.

"The key secular factor is a maturing market in the U.S., and the cyclical factors include an echo of the calendar year 2001 drop in PC unit sales and more difficult year on year compares," wrote Sacconaghi. "We also believe that consumer PC sales may face even stronger pressure than corporate PCs, given high oil prices, fewer refinancings and anniversarying of child tax credits."

On Wednesday, UBS downgraded Dell to a neutral from a buy rating partly due to the outlook for softer PC growth. "Dell has outperformed year to date, benefiting from falling component prices and solid corporate demand, but we believe a slowing PC market may make revenue upside harder to achieve in fiscal year '06," wrote UBS analyst Ben Reitzes.

Data from research houses Gartner and IDC respectively show the U.S. computer market saw annual unit growth of between 5% to 7% in the third calendar quarter, down from 9% to 10% in the second quarter and 16% to 17% a year ago.

Some have speculated that Dell had to offer unusually juicy deals in the quarter in a bid to goose demand. Others, however, said the company's low prices just showed it was passing on cost savings from component price declines.

As for the fourth quarter, analysts think the company can increase revenue 8% to $13.5 billion, with earnings rising 9% to 36 cents a share.

Prudential analyst Steven Fortuna recently predicted in a note that Dell's share price -- it closed Wednesday at $36.85 -- isn't likely to rise much unless the company offers an outlook better than the consensus estimate.

But in the turbulent tech universe, never underestimate the appeal of simply doing what's expected. After Dell's last report in August, when the company issued guidance that was merely in line with expectations, investors still saw fit to reward the stock in next-day trading.

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