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Expect Dell to Keep Its Groove On

Having upped guidance at the start of last month, no one fears a nasty shock from the computer maker.

This afternoon, investors will get a chance to see if the

Dell

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juggernaut has lost any of its momentum. The early odds are no. If anything, the company's likely to continue the hard-charging market-share grab that has made it the bane of other boxmakers.

Given that it upped guidance as recently as Oct. 1, most analysts think Dell should have little problem meeting its projections for a 21-cent profit on $9.1 billion in revenue.

"They've been having positive preannouncements and growing in a very difficult environment, and I think they should continue to grow well," says A.G. Edwards' Shebly Seyrafi, who expects sales guidance of around 7% growth for the quarter now under way. (His firm has no banking relations with Dell.)

No Sharing Here

Though Dell will eventually run up against a wall in terms of share gains, it still has room to grow as a low-cost leader among computer outfits, Seyrafi believes. "They have about 16% of the worldwide desktop and portable market, and that can grow to 20% or 25% -- some people think as much as a 30% share," he says. Dell draws about four-fifths of its revenues from sales of desktop and portable computers.

The latest research shows that in the second quarter, after months of steady share gains, Dell finally toppled

Hewlett-Packard

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from its seat as the No. 1 PC vendor. It now leads H-P by a slim margin, with 15.8% of worldwide unit shipments to H-P's 15.7%, according to Gartner.

Granted, there are signs H-P has fought back. In the past two months H-P has responded to Dell's pressure with substantial price cuts.

IBM

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has employed a similar strategy. So far it looks as if Dell has been reluctant to match discounts from those companies, relying more on its brand to encourage sales, notes First Albany analyst Walter Winnitzki.

"Overall consumer PC pricing has gotten more aggressive in the last few months, which represents a change in tone from what we saw in the last year or so. At this point, we would not say a 'price war' has broken out, but clearly the tone has gotten more aggressive and needs to be watched further," he writes in a note. (First Albany has no banking relations with Dell.)

Seeking Stability

Dell's average selling prices (ASPs) for the most recent quarter are likely to stay flat, against a backdrop of 7% unit growth, according to a forecast from Lehman's Dan Niles. But going forward, he expects Dell to benefit from stabilization at U.S. businesses. "Given that about 70% of Dell revenues are from the U.S., where they have 29% share and 40% share in large corporations, this has an outsized impact on Dell's financials," he writes. (Lehman hasn't done recent banking for Dell.)

Despite the relative near-term strength, Dell shares aren't cheap, trading at around 26 times calendar 2003 earnings. A rarity among tech stocks, it's actually gained year to date, tacking on 8% based on Tuesday's close of $29.48, even as the S&P's computer index has dropped 29%.

Seyrafi has a hold rating on the stock based on its valuation. Although the company's likely to keep gaining share, he says, the long-term outlook for revenue growth in its core PC market is only about 4% a year. And it's Dell's PC business that really matters, accounting for $25 billion of total revenues of $31 billion in fiscal year 2002.

Granted, the remaining 20% of the business, including servers, workstations, and network switches, has better growth prospects, and new markets like printers and handhelds could also kick in extra profit. But those lines are likely to offer only incremental gains. "Those are all possible growth drivers, but they're going off a low basis, in my opinion," Seyrafi says.