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Dell on Deck: Approach With Caution

Dell may be set for a fourth-quarter PC boost, but analysts warn that investors should approach the company's stock with caution.



) --


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will likely see a boost in PC sales when it reports its fourth-quarter results after market close, but investors may need to approach the company's stock with caution.


Our cautious long-term investment thesis

is unchanged," wrote Doug Reid, an analyst at Thomas Weisel Partners, in a note released on Wednesday. "We maintain a Market Weight rating on Dell shares based in large part on our concerns over Dell's longer-term competitive dynamics with


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Dell's tablet

The analyst also warns that Dell's services business, following its

$3.9 billion acquisition of Perot Systems

, is up against both H-P and IBM's Global Services behemoth. "We note that Dell's services organization is still small relative to its peers," he added.

Whereas Dell's services operation accounts for 15% of the company's total sales, H-P's is just under 29%. IBM's services make up a massive 55% of its total revenue.

Dell is nonetheless expected to post decent fourth-quarter numbers. Earlier this week rival H-P

surged past Wall Street's estimates

, boosted by sales of PCs and servers. There are

high hopes for Dell


Analysts surveyed by Thomson Reuters have forecast fourth-quarter revenue of $13.85 billion and earnings of 27 cents a share, compared to $13.4 billion and 18 cents a share in the prior year's quarter, when the firm also took an 11 cent hit form stock options and severance payments.

Dell's margins, however, will be closely monitored.

"There is upside potential to consensus estimates as the PC market improves and the server refresh continues," wrote J.P. Morgan analyst Mark Moskowitz, in a note released on Wednesday. He added a caveat: "To become more constructive on the stock, we need to see margins expand more than 100 basis points, reflecting an improved mix, and we do not anticipate this event, yet."

Moskowitz, who maintained his underweight rating and $15.50 Dell price target, expects the company to post a fourth-quarter gross margin of 18.4%.

Thomas Weisel analyst Reid echoes Moskowitz's sentiments, and forecasts fourth-quarter sales of $14.13 billion and earnings of 28 cents a share.

"We expect upside to be driven primarily by a growth in overall PC industry demand together with a strong performance by Dell in the storage market, which together we expect will offset seasonal weakness in the public sector," he wrote. "

But Dell will face continued pressure on gross margins in the quarter as a result of component price headwinds and a higher mix of consumer products due to holiday season sales."

Like many firms, Dell did not have the easiest of times during the recession, and has also had to contend with

fierce competition

from computer rivals


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The company's

third-quarter sales

came in below analysts' estimate, and were down 15% on the prior year's quarter.

All the initial signs, however, point to a fourth-quarter turnaround.

The tech bellwether

recently received an upgrade

from Bank of America/Merrill Lynch, on the strength of an improved spending climate and EPS upside. Upgrading Dell to buy from neutral, the analyst firm pointed to

the PC rebound


Dell's stock rose 21 cents, or 1.49%, to $14.82 on Thursday.

-- Reported by James Rogers in New York


>>H-P Raises Guidance, Beats Q1

>>H-P, Dell Feeling Netbook Love

>>Dell Upgraded, Poised for Sales Growth

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