It's a Wall Street ritual. After a positive earnings report, analysts line up to upgrade. Is anything easier?
Apparently not. Five analysts, including those from such well-known shops as
Salomon Smith Barney
BancBoston Robertson Stephens
Deutsche Banc Alex. Brown
, all rushed to upgrade
this morning after the company's second-quarter earnings easily beat Wall Street estimates. Accordingly, the stock was up 3 5/16, or 8%, at 44 7/16 around midday on Wall Street.
It's easy to upgrade after the fact, but it's the analysts who alerted their clients weeks or months before the strong numbers came out who deserve the kudos. Analysts such as Richard Chu of
and Michael Geran of
, a clearing division of
Donaldson Lufkin & Jenrette
, were the dynamic duo on Dell this summer.
On Tuesday, Dell reported that second-quarter earnings rose 47% to $507 million, or 19 cents per share, from $346 million, or 12 cents a share, in the year-ago quarter. Most analysts expected Dell to earn 17 cents a share for the quarter.
Catching the Wave
*Price as of noon. Source: Baseline
Geran may have made the most astute Dell call, raising the stock on June 17 to a buy from a hold/buy. At the time the Round Rock, Texas-based PC direct seller was slumping at 35 7/8. Remember, back then Dell had failed in back-to-back quarters to meet analysts' revenue-growth targets. Analysts were accordingly concerned that Dell, among the best-performing stocks of the 1990s, had lost its edge and that a new wave of low-cost computers would hamper Dell's robust earnings and revenue growth, as they had with so many boxmakers.
"The thinking early this summer on the Street was, Why pay for the Dell premium anymore?" fund manager Philip Treick said recently. Treick, who owned a big stake in Dell when he was manager of two
funds, will soon open his own
Aesop Capital Partners
money-management firm. Geran says his clients -- not individuals but small brokerage shops affiliated with DLJ -- were lucky to catch Dell at the bottom. Since mid-June, its stock has quietly added 24%.
Dell could be off to the races once again, says Chu, who raised his Dell rating to strong buy on July 12. "I'm obviously happy to see what Dell posted this quarter," says Chu, whose stock-picking skill was noted by
The Wall Street Journal
in its annual survey. He says he started getting more positive in June, when market psychology on Dell was very negative. "That was a starting point for me, that cheap PC concerns were masking the fact that Dell's win rates were really accelerating," he explains. Cowen has done no recent underwriting for Dell.
Chu, who has been covering Dell since 1992, may have been a bit early on a big Dell stock move. But Chu argues that the Street's entire thinking on Dell this summer has been wrong by not taking into account Dell's ability to sell services and peripherals to its corporate customers. Just as
has been able to sell services to individual consumers, Dell is slowly learning it can do the same with its corporate clients.
Dell now sells a tech-support package called Carefree Services to corporate clients for $321. The program yields 35% gross margins, says Chu, a Cowen veteran of 27 years. "
are doing this work for Dell, so these services attachments should keep its gross margins from falling as much as investors had feared," he says. Dell reported surprisingly strong gross margins of 22% Tuesday, down only fractionally from a year ago and up from 21.5% in its first quarter.
Geran, who prefers to stay out of the limelight, said Dell's storage business convinced him that it could weather all the negative sentiment. "I also follow
, and I knew how good a business that was," says Geran, whose firm has underwriting relationship with Dell.
But will EMC's purchase of
pose any threats to Dell? "I think Dell and EMC will work it out, they both need each other's business," says Geran. "Dell will be just fine, thank you."