1 dell inc. - still a growth company? stefan eisner december 1, 2005
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2
Stefan EisnerDecember 1, 2005
Outline
Company Facts
Portfolio Position
Business Strategy – key tenets
Segmentation by product & geographical
Industry – current developments
Stock Facts
Valuation
Recommendation
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Stefan EisnerDecember 1, 2005
History
1984 Michael Dell founds Dell Computer Corporationsimple concept: selling computer systems directly to
customers
1987 International expansion -> opening of subsidary in UK
1988 IPO (3.5m shares at $8,50 each)
1989 Company introduces first notebook computer
1990 Opened manufacturing center in Limerick, Irland-> serve European, Middle Eastern and African Markets
1993 Joins ranks of the top-5 computer system makers worldwide
1997 Dell introduces its first workstation systems
1998 Dell introduces its PowerVault storage products
2000 Company sales via Internet reach $50 million per day
2001 For the first time, Dell ranks No. 1 in global market share
2003 Dell enters consumer electronics
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Stefan EisnerDecember 1, 2005
Company Facts
Headquarter: Round Rock, Texas
Chairman of the Board: Michael Dell
CEO, President: Kevin B. Rollins
Revenues last four quarters: $54,182m
Net Income last four quarters: $3,565m
Broad range of products & services– Enterprise systems (servers, storage, workstations, networking products)
– Client systems (notebook, desktop computer systems)
– Printing and imaging systems, software and peripherals and global services
Employees: 63,700
Financial Year End: January
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Stefan EisnerDecember 1, 2005
Portfolio Position
Bought 500 shares at 41.75 on 12/10/99
Cost of position: $20,875.00
Closing price 11/30/05: $30.151
Value of position: $15,075.50
Change: -$5,799.50 (-27.78%)
Reviewed on December 2002 and November 2004 (Hold)
% of Portfolio: 5.31%
Jack Henry and Macrovision are also in the Technology Sector
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Stefan EisnerDecember 1, 2005
Business Strategy – key tenets (I)
Direct relationship is the most efficent way to the customer Dell‘s „direct business model“ eliminates wholesale and retail dealers
No expenditures associated with the retail channel
constant flow of information about customers’ plans and requirements
enable Dell to continually refine its product offerings
Custom-built products and custom-tailored services Build-to-order manufacturing process
Turn over inventory every 4 days on average and reduce inventory levels
Rapidly introduce the latest relevant technology
Rapidly pass on component cost savings directly to customers
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Stefan EisnerDecember 1, 2005
Business Strategy – key tenets (II)
Low-cost leader Efficient supply chain management and manufacturing organization
Concentration on standards-based technologies
Direct business model
Pass those savings to its customers
A single point of accountability for its customers Offers an array of services
Standards-based technologies deliver the best value to customers Provide customers with flexibility and choice
Benefit of extensive research and development
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Stefan EisnerDecember 1, 2005
Sales & Marketing
Channels of Distribution Sales representatives
Telephone-based sales
Online sales through www.dell.com
Marketing programs for specific customer groups Large business & institutional customers
Field sales force, account teams (system engineers and consultants)
Small-to-medium business & consumers
Advertising on television, Internet, print media and by mailing publications
Dell Direct Stores: view Dell products in person and purchase with assistance
Goverment, healthcare and education market
Specific sales and marketing programs
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Stefan EisnerDecember 1, 2005
Manufacturing, Materials Supply & R&D
Manufacturing Build-to-order manufacturing process
Process consists of assembly, software installation, functional testing and quality control
Locations: US(3), Brazil, Ireland, Malaysia, China
Materials Supply Large number of suppliers
BUT Intel Corporation as a sole source supplier of processors and Microsoft sole source supplier for various operating systems and application software products
R&D Very low expenses: $464m for fiscal 2005 (0.94% of Revenue)
HP (4.3%), IBM (5.9%), Sun (16.3%)
Company uses partners (e.g. Intel, Microsoft, EMC, Lexmark) to develop technology
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Stefan EisnerDecember 1, 2005
Segmentation by product & services categories
Beginning Q1-FY06 supplemental revenue reporting by product & services
Q3-FY 06 (total revenue: $13.9 billion)
Desktop PC‘s still most important, but decreasing
percentage change to Q3-FY05
-5%
1%
0% 0%
2% 2%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Desktop PCs Mobility Servers Storage EnhancedServices
Software &Peripherals
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Stefan EisnerDecember 1, 2005
Segmentation by product & services categories
Beginning Q1-FY06 supplemental revenue reporting by product & services
Q3-FY 06 (total revenue: $13.9 billion)
Desktop PC‘s still most important, but decreasing
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Stefan EisnerDecember 1, 2005
Segment - Revenues (million $)
19,394
5,6536,912
21,888
6,7158,4957,896
12,312
6,322
3,4454,346
27,652
-
5,000
10,000
15,000
20,000
25,000
30,000
US Business US Consumer Europe Asia Pacif ic - Japan
FY03 FY04 last 4Q
Geographical Segmentation
Operating margin last 6 Quarters
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
Q3-FY06Q2-FY06***
Q1-FY06Q4-FY05**
Q3-FY05Q2-FY05
US Business
US Consumer
Europe
Asia Pacific - Japan
total
Revenue Growth Rates
13.8% 12.9%
23.4%
10.2%
24.7%
-1.9%
19.3% 19.8%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
US Business US Consumer Europe Asia Pacif ic - Japan
last 2.75years last year
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Stefan EisnerDecember 1, 2005
Dell‘s Market Share PC‘s*
Q2 CY05Rank Q2-CY05 Q1-CY05 Q4-CY04 Q3-CY04 Q2-CY04
Worldwide share: 1 18.9% 18.5% 16.8% 17.9% 18.1% United States 1 34.4% 33.9% 32.9% 32.9% 33.3% EMEA 2 13.4% 13.3% 10.1% 11.6% 12.5% Asia Pacific 3 8.8% 7.5% 7.2% 7.0% 6.9% Japan 3 13.7% 11.6% 11.8% 10.9% 12.0%
US Segment share: 1 34.4% 33.9% 32.9% 32.9% 33.3% Education 1 43.9% 41.9% 39.9% 46.0% 45.5% Government 1 34.3% 33.9% 34.5% 34.8% 32.3% Home 1 28.8% 30.8% 30.5% 29.0% 28.2% Large Business 1 1 46.7% 44.5% 44.7% 43.8% 44.6% SMB 2 1 31.0% 31.2% 28.7% 26.6% 28.5%
Trailing 5 Quarter Share
* PC's includes desktops, portables, and x86 servers, data as of August 20051 Large Business includes sites with more than 500 employees2 Small and Medium Business includes sites with less than 500 employees
Based upon IDC Worldwide Quarterly PC Tracker
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Stefan EisnerDecember 1, 2005
Industry – current developments (source: report Mintel cooperation)
Demand for Mobility First time in April 2005 laptop sales surpassed desktop sales
Increasing broadbrand penetration Consumer use their computer more and more for multimedia activities
Declining Prices Increasing number of units shipped, but declining overall revenues
Average computer prices fell nearly 35% between 2000 and 2005
Prices have continued to fall, especially laptop prices
Low Cost – defining aspect of competition Most important advertising in newspapers circulars
Chinese imports continue to grow leading computer equipment importer to the U.S.
From $11.9 billion (2002) to 29.5 billion (2004) +147.9%
Lenovo, a chinese company, bought IBM‘s PC division in early 2005
Municipal wireless infrastructure drives notebook sales 100+ cities implementing wireless infrastructure
1000+/- cities working on plans for wireless Internet networks
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Stefan EisnerDecember 1, 2005
Industry – US Home Computer market forecast
Year Sales at current prices$million Index % change
2005 (est.) 5,883 100 -2006 4,954 84 -15.82007 4,029 68 -18.72008 3,108 53 -22.92009 2,191 37 -29.52010 1,265 22 -42.3
DesktopYear Sales at current prices
$million Index % change2005 (est.) 7,488 100 -
2006 8,031 107 7.32007 8,613 115 7.22008 9,236 123 7.22009 9,904 132 7.22010 10,620 142 7.2
Laptop
Desktop - Sales at current prices (million $)
5,883
4,954
4,029
3,108
2,191
1,265
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2005 (est.) 2006 2007 2008 2009 2010
Laptop - Sales at current prices (million $)
7,4888,031
8,6139,236
9,90410,620
0
2,000
4,000
6,000
8,000
10,000
12,000
2005 (est.) 2006 2007 2008 2009 2010
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Stefan EisnerDecember 1, 2005
Share Buyback
• YTD have repurchased 138 million shares More than 3x the stock options Dell expect to grant for the full year• Plan to spend at least $1.7 billion in Q4
Will continue in the future, because Dell has a high Free Cash Flow, but very few investment opportunities OR Dell will start to pay dividends
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Stefan EisnerDecember 1, 2005
SWOT – a overview
•Leading market position
•Notable clientele (large companies, state goverments)
•Superior business model
•Strong operating performance
•Cash Cow
•No traditional pension plans•Partnership with Microsoft
(creating single tool managing hardware and software)
•Leading market position
•Notable clientele (large companies, state goverments)
•Superior business model
•Strong operating performance
•Cash Cow
•No traditional pension plans•Partnership with Microsoft
(creating single tool managing hardware and software)
• Single source suppliers
• Low R&D spending
• Poor customer service
• Problems in China
• Single source suppliers
• Low R&D spending
• Poor customer service
• Problems in China
INDUSTRY
• Growth in the digital color printer maket
• Sale of IBM‘s PC Business to Lenovo (Europe/US)
• Trend to more modular, standard products and clusters of less expensive machines (server&storage)
COMPANY
• Printer Replacement business
• Expansion of product portfolio (consumer electronics)
• International Expansion
• Entering new markets through partnership
INDUSTRY
• Decreasing PC prices
• Desktops revenues will decrease heaviley until 2010
• Porter‘s five forces: - High Industry Rivalry - High Bargaining Power of
Buyer
• New CEO at HP -> cost reducing
• Sale of IBM‘s PC Business to Lenovo (Asia)
• Asian „No-Name“ producer
• Increasing component prices
SS
OO TT
WW
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Stefan EisnerDecember 1, 2005
Competitors
DELL HPQ IBM SUNW Industry
Market Cap: 72.29B 85.00B 140.42B 12.87B 1.13BEmploy ees: 55,200 N/A 348,052 31,000 1.90KQtrly Rev Growth (yoy): 11.30% 7.10% -7.80% 3.70% 7.30%Revenue (ttm): 54.18B 86.70B 94.38B 11.17B 3.76BGross Margin (ttm): 17.97% 23.36% 39.17% 42.25% 17.97%EBITDA (ttm): 4.77B 7.30B 18.48B 588.00M 90.66MOper Margins (ttm): 8.11% 5.72% 14.14% -1.50% 1.98%Net Income (ttm): 3.23B 2.40B 8.57B -97.00M -415.22KEPS (ttm): 1.293 0.824 5.16 -0.029 N/AP/E (ttm): 23.32 36.01 17.23 N/A 23.53PEG (5 yr expected): 1.12 1.32 1.57 N/A 1.99P/S (ttm): 1.35 0.99 1.49 1.19 1.13
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Stefan EisnerDecember 1, 2005
Share price: $30.15 (52-Week range $28.62-$42.57)
Market cap: $72.29B
Trailing P/E: 23.32
Forward P/E (fye 28-Jan-07):16.94
Dell has never paid a dividend
Sector: Technology
Industry: Personal Computers
% held by Insiders: 9.85%
% held by Institutions: 65.5%
Ticker: DELL
Stock Facts
Source: Yahoo!Finance 11/30/05
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Stefan EisnerDecember 1, 2005
Stock Performance last 2 years vs Competitors
Vs: Hewlett Packard, IBM, Gateway
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Stefan EisnerDecember 1, 2005
Valuation – 3 Scenarios
Verification of Forecast and Assumptions of Segments by:• Calculating ratios• Computing Implied Growth rates of Geographical segments• Reviewing sales development
bad normal goodDesktop decrease flat slow growthMobility "pricewar" normal growth rates still higher growth ratesOther slow down normal level high level
cost of revenue increase constant decreaseS,G & Adm slightly increase average 05 and 06 decreasingDCF-Price 23.39 31.40 35.98
+10% 25.73 34.55 39.57-10% 21.06 28.26 32.38
P/E based on EPS06 14.41 19.35 22.16
Scenario
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Stefan EisnerDecember 1, 2005
Valuation – sensitivity analysis (normal)
beta 4.70% 4.80% 4.90% 5.00% 5.10% 5.20% 5.30%0.69 36.78 37.37 37.98 38.62 39.28 39.97 40.69 0.74 34.88 35.41 35.95 36.51 37.10 37.71 38.34 0.79 33.18 33.65 34.13 34.63 35.15 35.69 36.25 0.84 31.63 32.06 32.49 32.94 33.40 33.89 34.38 0.89 30.23 30.61 31.00 31.40 31.82 32.25 32.70 0.94 28.95 29.29 29.65 30.01 30.39 30.78 31.18 0.99 27.77 28.08 28.41 28.74 29.08 29.43 29.79 1.04 26.69 26.97 27.27 27.57 27.88 28.20 28.53 1.00 27.55 27.85 28.17 28.49 28.83 29.17 29.53
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Stefan EisnerDecember 1, 2005
RECOMMENDATION - Considerations
Source: Yahoo!Finance 11/30/05
HOLD largest geographical segment (American Business
Units) growing and operating margin increases
Growth opportunities outside the US
Still superior business strategy
Expansion to higher margin products (printer replacement, storage&servers, business customer…)
Share buyback
Almost no debt
After the decrease in the stock price, lower growth rates are partially contained in the price
SELLOther geographical segments only flat or negative Operating income growth
Problems in China, UK…
Increasing rivalry by Asian companies
pricewar desktops and mobility products, which are almost two thirds of the revenue
no further investment opportunities
No long term-guidance of the company
historic high double digit growth rates are improbable
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Stefan EisnerDecember 1, 2005
RECOMMENDATION - SELL
SELL the entire position of Dell shares (500)
DCF only slightly above actual share price
High level of uncertainty about Dell futures
– Diversification of product portfolio and further expansion outside the US CAN be successful, but it MUST be successful to maintain high growth rates
– No guidance of the company for next year
Still a growing company, but the high growth rates of the past are improbable
If we follow our investment approach, there are better companies to own
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