Time to Sell Dell, Buy Cisco and HP

NEW YORK (TheStreet) -- Giving computer giant Dell (DELL) the benefit of the doubt is something that has always come easy for me. However, while its chief rival in Hewlett-Packard (HPQ) is seeing light at the end of the tunnel, Dell makes me think that the light that it sees is an incoming train -- one that it simply is unable to avoid.

On the heels of another disappointing quarter for the company, I think Dell has now reached a point where it needs to reassess its strategy and start thinking about its future. As bad as things once looked for the company, Wall Street is starting to get a sense that things just may be getting worse.

The company reported first-quarter earnings of 43 cents per share on revenue of $14.4 billion. This compares to analysts' estimates of 46 cents per share on revenue of $14.9 billion. So not only did the company miss on both the top and bottom lines, but revenue arrived 4% lower than the same period of a year ago while also demonstrating declines in some key segments.

For example, aside from the fact that a decline was seen in its large enterprise revenue which came in at $4.4 billion, the company also continued to lose in that once-special consumer market where it lost 12% in the quarter to $3 billion. What this says is that as it is losing consumers to Apple ( AAPL), it is also struggling against the likes of HP and Cisco ( CSCO) to keep its footprint in the enterprise.

During the announcement, the company talked about its transition away from PC sales while citing revenue increases in areas such as storage, servers and network equipment and services. The company's CEO, Michael Dell said, "We're committed to continuing our strategy to reshape Dell's business as an end-to-end IT provider."

It all sounds great, however these are key markets that are already dominated by names such as EMC ( EMC) and IBM ( IBM) as well as HP and Cisco. Its earnings already suggest it is not competing effectively in areas it once dominated, so it is a bit challenging to be optimistic about its entry and focus in it non-core areas.

It seems as though not too long ago the company was riding high on the stock market as it quickly dismissed early threats of Gateway to keep its dominance as the built-to-own brand. Dell was able to successfully leverage its quality and popularity to become a powerful force in both the consumer and enterprise environments. It just seems as if things got off course due to the growing popularity of not only Apple but also due to the overall trend of increasing use of mobile devices which coincides with declining PC sales.

The company is now the perfect example of how a market leader can quickly become a has-been if it does not adapt. In essence, it is quickly becoming the hardware version of Novell, Netscape and Lotus which were all easily killed off by Microsoft ( MSFT). As with Research in Motion ( RIMM), it seems that Dell is on the path toward irrelevance, being victimized by Apple. Meanwhile HP recently demonstrated that it can do just fine by making a few strategic adjustments.

The question is, what will it take for Dell to inspire the same level of optimism? Even more important, how can it get investors and analysts to believe?

Bottom Line

So far it appears that the company's management has been unable to find the right formula to convince Wall Street that, even at a paltry price-to-earnings multiple of 6, it still has value as an investment. While the shares may look like a bargain at these levels, I can also see how it can trap some unsuspecting investors who don't really see the sad story that Dell has become.

From an investment standpoint, until the company can show that it can execute and overcome distractions from some recent acquisitions such as SonicWall, I would stay away from Dell and instead buy Cisco and HP which offer much better value with better execution.

For now, I have to concede that Dell is one stock that Wall Street has gotten right and I have to also admit that I was wrong for calling it a buy ahead of earnings.

At the time of publication, the author was long CSCO, AAPL and MSFT.

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