financial analysis and forecasting professor carlos vecino e14 - team 91 case: dell

Financial Analysis and Forecasting

Professor Carlos Vecino

E14 - Team 91

Case: Dell

Dell suffered a dramatic fall in its stock price during the year 2000.

The fall in stock price was generated by internal poor performance or was it a general industry crisis?

Presenter: Anya Grant XU OLIVEIRA ZHENG O’CONNELL

HEC Montreal – Team 91 – December 3rd, 2003

Agenda

Overview of the IT Industry in 2000

Overview of the PC Industry in 2000

Dell and Industry Ratios

Observations and evaluations of Dell’s Performance and Stock Price

Notes

Questions

IT Industry PC Industry Observations NotesDell and Industry AnalysisHome


Overview of the IT industry 2000

US faced it’s most controversial election in 2000 bringing political instability to the an already weakening economy. This exacerbated IT industry problems.

IT Industry PC Industry NotesDell and Industry AnalysisHome Observations



“Wall Street: Is the party over?” is stated in the Business Week Cover in April, 17th, 2000.

Time Europe “A Market Fit to Burst”

The IT Industry was facing a general scenario of caution by investors and the

IT companies’ stock values began to fall dramatically.




The Nasdaq Index experienced tremendous growth in September,

1999, but started to fall, “coming back to earth” (Business Week April 2000).




The TOP 10 fall records in the Nasdaq history happened in the year 2000.



Overview of PC Industry and the Economy US quarterly GDP saw slow growth in Q4 of 2000 and negative growth in

Q1 2001. Most economists predicting first recession since early 90’s.

Reduced tech spending among major US firms will have a negative

impact on sales. “Especially hard-hit in these purchasing trims: PCs … that don't provide much profit bang for the buck.” (Business Week, Dec. 18, 2000)

The falloff in corporate IT spending has spread worldwide, too, coming

home to roost among American suppliers. In Europe, slow adoption of Microsoft Corp.'s new Windows 2000 software has pulled down corporate PC sales by over 20% this year. That slammed the earnings of … Dell Computer Corp., which had counted on the European market for a sales boost.



Dell and PC Industry Analysis

Dell’s Performance Highlights

Common Size comparisons

Base Year Comparisons

Liquidity Ratios

Efficiency Ratios

Financial Leverage

Profitability Ratios

ROE Decomposition



Dell’s Performance Highlights

Dell revenues increased 26% in 2000 over 1999.

EBITDA increased 20%

The EBITDA as a proportion of revenues decreased by 7% in 2000 in comparison with the same proportion in 1999.

The net income increased 31% in 2000

Analyzing the Common Size combined with the Common Base Year, net profit as percentage of sales increased 4%.

Total current assets increased by 24% in 2000 over 1999 and total current liabilities increased 26% in the same period.



Common Size Comparison Highlights

Industry average of inventory as a percentage of total assets is 9,6%.

Dell carries inventory valued at 2,9% of its total assets.

The industry average for COGS as a percentage of revenues is 72%.Dell has COGS as 80% of its revenues.

The industry selling expenses average represents 14% of the revenues.

For Dell, this represents only 10% of revenues.



Common Size Comparisons

The current assets of Dell represents 70.64% of its total assets.

The industry current assets over total

assets average is 58.35%. In 2000, Cash and Securities represent

40.5% of total assets vs. competitor’s average of 10.3%.

We can assume that Dell has less proportion of assets as fixed costs than the average of its competitors.

Current Assets

58.35%

70.64%

42%

29%

IND. AVG Dell

% of Current Assets and Other Assets

Current Assets

Other AssetsOther Assets



Common Base Year Comparisons

In 2000, Dell’s cash increased 32% over 1999, industry average dropped 35% ;

Dell’s inventory increased 2%; industry average increased by 22%;

Dell’s net income increased 31%; industry average dropped 8%;

Dell’s EPS increased 27%; the industry average dropped 8%;

Dell’s net cash provided by operating activities increased 7%; industry average dropped 31%.



Dell and Industry Liquidity

In 2000, Dell’s current ratio was

7% better than the average of it’s competitors.

HP had a result 6% better than Dell in 2000.

Dell had a current ratio

20% better than IBMin 2000.

1999 2000 1999 2000



Dell and Industry Liquidity

In 2000, Dell improved its results by 11% in Cash plus securities over its total assets from 1999.

All major competitors saw their ratios decline in 2000.

This ratio is 290% better than the average.

1999 2000 1999 2000



Dell and Industry Efficiency

At the end of 2000, Dell held 5.74 days of inventory vs 7.12 in 1999.

The average industry result for this ratio was 32.58 days.

Dell achieved a result 82,4% better than the industry average, which means approximately 26 days of better efficiency managing the inventory. 1999 2000 1999 2000



Dell and Industry Efficiency

Dell achieved in 2000 a financing period of -23 days.

This result is 82 days better than the average of industry of +59 days

1999 2000 1999 2000

DELL

IND. AVG

IBM

GATEWAY

HP

COMPAQ



Dell and Industry Financial Leverage

Dell’s Debt over EBITDA is 56% lower than the average for the industry.

1999 2000 1999 2000

Total Debt over EBITDA

17.25

90.16

23.94

4.76

39.62

20.71

69.7

9.64

0

39.67

DELL

IBM

HP

COMPAQ

IND.AVG.



Dell and Industry Financial Leverage

Dell is able to pay 58 times its interests.

The average industry is able

to pay 13.6 times its interests.

1999 2000 1999 2000



Dell’s Profitability

In 2000, Dell achieved a

return on assets of 16,2%.

This performance was

130% better than the industry average and up 6.7% from 1999.

Return on Assets

2%

10%11%

9%

15%

8%

2%

11%

6%

9%

16%

7%

COMPAQ HP GATEWAY IBM DELL AVERAGE

1999 2000 1999 2000



Dell’s Profitability

In 2000, Dell achieved a

return on common equity of 39%, up 26% from 1999.

This performance was

96.5% better than the industry average in 2000.

IBM achieved a return on equity of 38%.

Return on Common Equity

4%

19%21%

40%

31%

21%

5%

26%

10%

38% 39%

20%

COMPAQ HP GATEWAY IBM DELL AVERAGE

1999 2000 1999 2000



Dell – ROE Decomposition

The Du Pont Identity

ROE = Net income/Sales * Sales/Total asset * (1+Debt/Equity ratio)

= Profit margin * Total asset turnover * Equity multiplier

= Operating efficiency * Asset use efficiency * Financial Leverage

ROE Profit Margin Total asset turnover Equity multiplier

Dell 1999 31.39% 6.59% 2.20 2.16

Ind. Avg. 1999 20.40% 5.82% 1.47 2.50

Dell 2000 38.72% 6.83% 2.37 2.39

Ind. Avg. 2000 20.00% 5.14% 1.61 2.62



Market to Book Ratio

24.37

9.51

11.21

4.91

3.09

8.04

7.27

2.43

4.4

2.12

DELL

IBM

GATEWAY

HP

COMPAQ

1999 2000 1999 2000

Dell achieved in 2000 a market to book ratio of 8.04.

The average for the industry in 2000 was 4.05.



Stock Price Comparison (Jan 1,1996 to Jan 1, 2001)

DELL had its stocks price declining from US$ 51 in

1999 to US$16 in 2000. Drop 70%.

Gateway stocks price dropped 75% in the same period, from US$72 to US$18.

IBM stocks price declinedonly 21% and HP 29%

85

108

32

45

18

72

51

1627

15

1996 1997 1998 1999 2000 2001

DELL

Gateway

IBM

Compaq

HP

1999 2000 Dif. %IBM 108 85 -21%HP 45 32 -29%

COMPAQ 27 15 -44%GATEWAY 72 18 -75%

DELL 51 16 -69%



Summary State of Competitive Advantages:

– COST LEADERSHIP + Direct Marketing :• Liquidity:

– Cash on hand increased 32% and Cash/Assets is 290% above industry;– Low fixed assets: Less than 30% of total assets (vs 42% industry average);

• Efficiency:– Low Inventories: Turnover of 5.7 days vs industry average of 32.6 days;– Cash-to-Cash: 82 days faster than industry average;

• Financial Leverage:– No short-term debt, and long-term debt: Interest charge coverage 425% above industry average;

• Profitability:– ROA: 130% above industry average;– Return on common equity : 39% --------- 96.5% higher than industry average and equivalent to IBM;

Results support benefits of current Direct Model strategy



Observations and Evaluation – Stock Price

RISE:– 5600% increase in share value over 4 years based on a combination of very favourable market conditions and

forecasts in mid to late 90’s and the successful implementation of the Direct Model Marketing strategy which gives Dell a clear, sustainable competitive advantage over competition in PC Industry;

FALL:– Penetration rates into homes reached 50% in 2000 and e-commerce transactions were much lower

than 90’s forecasts;– Sales growth in developed countries (America, Europe) down substantially;– Industry-wide shock punctuated by DOT.COM bubble burst;

Market Reaction:– Market re-evaluation of tech stocks, including DELL, on the heels of a major burst and on the toes of a pending recession;– Given going market conditions, investors may have perceived DELL’s focus on PC’s as “riskier” in comparison to more

diversified companies such as IBM and HP and stock value was adjusted accordingly; Observations:

– All ratios are consistent with business strategy and competitive advantage and are proof that DELL’s strategy works.

IF IT AIN’T BROKE, DON’T FIX IT!!!!!



Only one suggestion to the board to reduce slide of stock price:

– Dell have a final cash position of 5.4 billion.

– Different uses of cash to increase returns;

– By distributing more dividends, instead of having this final cash, Dell could perhaps have reduced the drop in its stock price.

Observations and Evaluation – Stock Price



Notes

This presentation and the corresponding excel graphs and analysis are available for students at:

http://ca.briefcase.yahoo.com/

Yahoo ID: hecdell

Password: team91


http://ca.briefcase.yahoo.com/

Questions ?

MBA 2003-2004TEAM 91

Financial Analysis and Forecasting

Professor Carlos Vecino

E14 - Team 91

Case: Dell – Second Part


Dell’s strengths and possible weaknesses

Strengths: low cost, high efficiency– Lower inventory – from 3.4% of assets to 2% in 2002

– Increase receivable turnover – growth of 41% from 2002 over 1999

– Decrease payable turnover

Possible weaknesses

– Decrease liquidity by reducing its current assets.

Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash


Short Term Solvency Ratios

Reduced Cash position

Improved Inventory Turnover Reducing Current Assets

Short Term Solvency

1.45

0.47

1.001.05

1.48

1.401.39

1.01 0.960.73 0.75

0.48

2000 2001 2002 2003

Current Ratio -32%Quick Ratio -31%Cash Ratio -35%



Main Uses of Cash -1999 to 2002

Dell increased investments 94%. In 1999 it was 23.7% of total assets and in 2002 investments represented 34% of total assets.

Dell bought back treasury stocks, reducing total equity from 46.3% of total liabilities + equities in 1999 to 31.5% in 2002.



Du Pont Analysis of Dell

Equity Multiplier increased as a result of:

Assets increased 35% from 2002 to 1999

Total equity decreased 8%in the same period

Return on Equity increased as a result of:

Dell’s Net Income increased 27%

Total equity decreased 8%in the same period

1999 2000 2001 2002 Dif 02/99

Profit margin 6.60% 6.80% 4.00% 6.00% -9%

Total asset turnover 2.2 2.37 2.3 2.29 4%

Equity multiplier 2.16 2.39 2.88 3.17 47%

ROA 14.50% 16.20% 9.20% 13.70% -6%

ROE 31.40% 38.70% 26.50% 43.60% 39%



Comparison Dell and Competitors (Du Pont Analysis, 2002)

The strong competitive advantage of Dell is still evident

The highest Profitability The highest Efficiency The highest ROA and ROE

Profit Total Asset Equity Margin Turnover Multiplier ROA ROE

Dell 6.00% 2.29 3.17 13.70% 43.60%

Ind. Average -1.43% 1.10 2.86 -3.17% -5.10%

IBM 4.40% 0.84 4.24 3.70% 15.70%

HP -1.60% 0.8 1.95 -1.30% -2.50%

Gateway -7.10% 1.66 2.4 -11.90% -28.50%


Questions ?

MBA 2003-2004TEAM 91

financial analysis and forecasting professor carlos vecino e14 - team 91 case: dell

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