Dell Stays Above the Fray

With its earnings report, the company should steer clear of the turmoil faced by its rivals.
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The computer industry is in turmoil, but Dell (DELL) - Get Report remains essentially untouched. The PC maker continues to ride solid execution and supply-chain efficiencies to improved financial results, which in turn have helped boost the stock even higher.

Dell will announce fourth-quarter financial results after Thursday's closing bell, continuing a busy two months for the computer industry in which


(HPQ) - Get Report

jettisoned its chief executive,


(IBM) - Get Report

cut loose its entire PC business, and



continues to redefine itself.

This has all been to the benefit of Dell. From its previous quarterly report, the Round Rock, Texas-based company's shares are up 11% to $41.47. During that same period, the Goldman Sachs Hardware Index is up 9.2%.

And even though the stock has been stuck within a trading range of $40 to $42.50 since mid-December, Wall Street is expecting good things from Thursday's report. Analysts currently expect earnings of 36 cents a share and sales of $13.5 billion, on average, according to Thomson First Call. That's earnings growth of 25% and sales growth of 18% from the same quarter last year.

Analysts pointed to IBM's personal computer struggles and relatively solid results from other technology bellwethers, like Dell supplier


(INTC) - Get Report

, as indicators that fourth-quarter demand for Dell wrapped up well.

"It's hard for a company of that size to really grow at a meaningful rate, but they are in the right product groups

to do so," said Bill Gorman, vice president of equity research at PNC Advisors, a $50 billion money management firm. He said Dell's execution advantages should enable it to outgrow the competition and that should contribute to strong growth -- even for a company of Dell's size.

Dell gets half of its sales from desktop computers, 30% from notebook PCs and 21% from sales of servers and storage products. At the start of the fourth quarter, Dell predicted sequential unit-shipment growth of 20%.

Gorman expects Dell to continue to expand its market share in the current year, and at a rate that doesn't constrict margins. He said Dell seems to be on a path of meeting or slightly exceeding Wall Street expectations and that the stock still has room to rise.

For the first quarter under way, growth continues to look solid: Analysts are expecting earnings growth of 30% to 36 cents a share and sales growth of 17% to $13.5 billion.

For the full year, Dell is expected to earn $1.58 a share on sales of $57.7 billion, representing earnings growth of 23% and sales growth of 17%.

Analyst Laura Conigliaro with Goldman Sachs said Dell could exceed those full-year targets. "With strong revenue and earnings growth and potential upside expected in fiscal year 2006, Dell is one of the few real growth stories, especially among large-cap tech companies," she said in a research note this week. (Goldman Sachs has an investment banking relationship with Dell.)

Likewise, analyst Les Santiago with PiperJaffray told clients that Dell's business should continue to roll over its competitors. "Dell enters 2005 with business model advantages and remains poised to take market share in PCs, servers, storage, and printers," Santiago said. (PiperJaffray has received noninvestment bank compensation from Dell in the past 12 months).

Indeed, market-shipment figures out of iSuppli on Wednesday show Dell expanded its leading share of the global computer market in 2004 by 1.2 percentage points, to 16.4%. Hewlett-Packard, IBM and


all trailed Dell.

Barry Jaruzelski, managing partner of the global technology practice at Booz Allen Hamilton, said the market-share numbers show that Dell still has room to expand its lead and that it can continue to distance itself from competitors. "Dell is an unremitting story of execution. It's an extraordinary company, but it is not a technology company. It is an operations company." (Booz Allen doesn't have an investment banking business.)

As for where the stock goes from here, PNC's Gorman has a price target of $48 on the stock. Investors continue to remain cautious about the possibility of contracting gross margins and mediocre growth in the global desktop PC market, but "we continue to think it's undervalued," he said.