shares have managed to buck the trend in an unforgiving tech market, rising year to date while archrival
have both crept into the red.
The stock is up with good reason. Heading into Dell's April quarter earnings report after the close Thursday, Wall Street has a decidedly sunny take on the hardware giant's business prospects -- a contrast from its more guarded outlook for H-P.
Befitting that view, Dell has traded up 7% this year, based on yesterday's close of $36.45, while H-P has dropped 12%. The Nasdaq is off almost 4%.
In fact, some investors argue that it's not even appropriate to compare the two companies. "We view Dell as more of a distribution model and not really a hardware company," said Rob Rohn, a co-manager on the
John Hancock U.S. Global Leaders fund, which has a stake in Dell. He said he doesn't particularly care that Dell sells technology; as an investor, he likes its substantial market position and massive cash flow (much like
, the only other tech stock in his fund). "They're subject to a
technology cycle, but they never lost money," said Rohn of Dell.
His fund doesn't own H-P, he added. "We wouldn't really be in a company that sells big iron, which may sell this year or may not."
But while Dell may be humming along in its usual dependable fashion, other money managers question whether the stock has much room to rise in the near term. The stock currently trades for about 28 times expected 2004 earnings and 24 times 2005 estimates, using Thomson First Call numbers.
Money manager Matt Kelmon sees Dell as a play on improved enterprise spending. "I think there's evidence that corporate spending is on the rise. But I'm not wildly excited about Dell at these levels, though I own it."
In fact, if Dell appreciates to around $37.50, he said he'd be inclined to trim his holdings within the
Kelmoore Strategy Eagle fund and add to his stake in H-P. "H-P, I think, is unloved, unappreciated and dirt cheap. It trades for less than its printer business; it's more of a value play," he said.
The problem, he added, is that there's no telling when investors will start to appreciate the value inherent in H-P. "It may be tomorrow; it may be five years from now."
In the meantime, Dell has momentum on its side. Aiding the relative strength in its stock price, on April 7 Dell upped its quarterly revenue guidance by $200 million to $11.4 billion, a nearly 20% increase from a year ago, on strong growth overseas. It maintained its initial guidance for earnings of 28 cents per share.
After analysts hiked their estimates, the consensus estimate now stands even with Dell's guidance, according to Thomson First Call.
But some analysts think Dell could offer a penny of earnings upside, given the higher revenue and the company's plan to increase quarterly share buybacks by an extra $500 million, for a total of $1.1 billion.
Of course, the high expectations create a potential downside. "If Dell decides not to show an extra penny this quarter, the stock could briefly sell off," noted Goldman Sachs analyst Laura Conigliaro, who said she'd recommend buying the shares if that happens.
By comparison, the early read on H-P's report -- scheduled for May 18 -- is more cautious.
Commenting on upcoming earnings reports from both Dell and H-P, Conigliaro wrote, "While both companies saw some tailwind, however small, from improving corporate spending, the resemblance pretty well ends there. Dell saw numerous areas of strength, gained share, and should be in a position to begin to harvest upside possibly this quarter and more definitively next."
On a less enthusiastic note, she said H-P "probably turned out generally OK." H-P encountered trouble earlier this year as it tried to work off an inventory build that occurred late in 2003, though analysts believe it's mostly past those problems.
Goldman has extensive business relationships with both Dell and H-P.
Conigliaro said she expects Dell to slightly best its upwardly-revised revenue target of $11.4 billion by about $50 million to $100 million. For now, she said, most of Dell's gains will come from market share enhancement, with macroeconomic improvements helping at the margin.
In the latest installment of the ongoing tug-of-war for PC market share, Dell unseated H-P for the No. 1 spot in the first quarter, increasing its share of global shipments to 18.6% from 16.9% in the prior quarter. H-P's share of shipments fell slightly to 15.6% from 16.7%, according to IDC.
In a shift that shows its increasing sensitivity to corporate spending, which pundits expect to rise this year, Dell has boosted the revenue share it draws from servers and storage. Heading into the tech slowdown a few years ago, the company pulled in 17% to 18% of sales from enterprise hardware. Now its enterprise segment accounts for 23%, noted Goldman.
Moreover, within Dell's flagship PC division, 55% of units sell into the corporate market, observed A.G. Edwards' David Wong. "Recent results out of Microsoft, IBM, Intel, EMC, and others have all supported a
corporate recovery pattern," he wrote.
He expects Dell to guide for 3% sequential revenue growth for the July quarter, which would put quarterly sales at $11.7 billion. That's slightly above the consensus estimate for $11.6 billion, with 29 cents earnings. He has a buy rating on Dell; his firm hasn't done banking for the company.
Another bullish call on Dell comes from Banc of America, where analyst Keith Bachman raised his rating on Dell from neutral to buy on May 5. In a note recommending the shares, he said he's grown more positive on Dell after deciding it can show upside in EPS or margins over the next several years, helped by its increasing tilt toward enterprise and services. Banc of America has provided investment banking services for Dell in the past year.
Also, Bachman said Dell will benefit from a better forecast for PC sales. The same day he raised his rating on Dell, he increased his calendar-year 2004 forecast for PC sales to 12.8% from 12%, citing robust first-quarter PC shipment figures.