WALL STREET NOW IN LOVE WITH HP !
WALL STREET NOW IN LOVE WITH HP !
2006-05-16 at 11:39:00 am #15461
May 06 In a reversal of fortune, Wall Street has fallen out of love with onetime darling Dell Inc. and is instead talking up rival and onetime laggard Hewlett-Packard Co.
A revitalized Hewlett-Packard company is eating into Dell’s profits.
For years, Dell, the world’s largest computer maker by number of computers sold, was the investor favorite. Dell pioneered selling personal computers directly to corporate and individual customers through the Internet and by telephone, a method that reduced inventory costs and allowed Dell to price its PCs more cheaply than rivals such as H-P – and still make a hefty profit. Using this direct model, Dell’s sales rose to $55.9 billion from $5.3 billion 10 years ago
Now the business model is looking a bit winded. For the first time in about 15 years, Dell is expanding more slowly than the U.S. PC market. A shift in PC growth from corporate purchasers to consumers, often in retail stores, and into international markets, two of the weaker areas in Dell’s business, is contributing to the sluggish performance. A revitalized H-P and other rivals such as Lenovo Group Ltd. are eating into Dell’s price advantage. On Monday, Dell said it would miss its first-quarter sales and earnings forecast.Now Wall Street is demanding an action plan. Even as Dell stock has dropped nearly 14 percent this year while H-P’s is up 15 percent, the Round Rock, Texas, computer maker doesn’t appear to want to acknowledge its problems. In an interview last month, Dell Chief Executive Kevin Rollins denied the company’s direct business model was troubled.”We didn’t grow as fast as we could have,” Mr. Rollins said. “While the growth may not have been as high as it was historically, the growth is still essentially higher than all our competitors.”
That talk isn’t cutting it with Wall Street, which is insisting Dell lay out a recovery plan, perhaps as soon as its May 18 earnings call. It has been “difficult and frustrating for investors” that Dell hasn’t outlined a course of action, said Toni Sacconaghi, an analyst for Sanford C. Bernstein & Co., in a report. Mr. Sacconaghi rates Dell “outperform.” Mr. Sacconaghi said that, in the long term, Dell has advantages because of its direct model, which will ultimately enable the company to gain share.Chirag Vasavada, technology analyst for money-management company T. Rowe Price Associates Inc., added that Dell has gone from a growth company to a turnaround story, and said the company needs to set realistic expectations for Wall Street. As of Dec. 31, 2005, T. Rowe owned 40.4 million shares of Dell, up from about 38 million shares at the end of the previous quarter.”We have gained share every year since 1995 in almost every customer segment and product category in each of our top 15 countries,” said Dell spokesman Bob Pearson. “It is clear that our model is being embraced throughout the world. We are confident that we are best positioned to grow and gain an even larger share of our $1.4 trillion industry in the years ahead.”On Monday, blaming overly aggressive discounting on PCs, Dell said it would earn 33 cents a share for its fiscal first quarter ended May 5, down from its original forecast of 36 to 38 cents a share. It revised its revenue forecast to $14.2 billion, down from a range of $14.2 billion to $14.6 billion.
Dell’s woes on Wall Street come as rival H-P’s star has ascended.For years, H-P had a PC unit that was in the red. Ever since 2004, when the Palo Alto, Calif., company decided to focus on the profitability of its PC business rather than market share, the unit has slowly recovered. H-P has benefited from selling PCs through retailers – something Dell doesn’t do – as more consumers test out laptop computers in person before buying them.H-P’s image has improved since Mark Hurd came on board as the company’s chief executive early last year. Mr. Hurd, who is regarded as an operations maven, has restructured H-P to give more control back to the business units, laid off employees and is overhauling the company’s sales process. H-P declined to comment.In February, H-P reported that its PC business generated operating margins of 3.9 percent; in many previous quarters, the margins were less than 1 percent. By comparison, Dell’s operating margins were 8.2 percent in its most-recent reported quarter.H-P is taking market share away from Dell, potentially positioning it to overtake Dell as the world’s biggest PC maker at some point in the future. In the first quarter of this year, Dell’s world-wide PC market share slipped to 18.1 percent from 18.6 percent a year earlier, while H-P’s share increased to 16.4 percent from 15.1 percent, according to research company IDC.”Dell shares have further risk,” wrote Bear Stearns analyst Andrew Neff in a report. “We like H-P given the turnaround.” In 4 p.m. composite trading Thursday, Dell shares were down 38 cents, or 1.5 percent, to $24.51 on the Nasdaq Stock Market, while H-P shares were down 55 cents, or 1.7 percent, at $32.53 on the New York Stock Exchange.Ken Smith, director of technology research for Munder Capital Management, said Dell could improve its image on Wall Street by agreeing to use chips, which essentially act as the brains of a PC, from Advanced Micro Devices Inc. Dell uses Intel Corp. microchips. In the past three years, analysts say, AMD chips have become faster, use less power and generate less heat than Intel’s products.
Striking a deal with AMD “would show (Dell is) going to be aggressive in bringing out competitive products and use whatever supplier they need to do that,” Mr. Smith said. As of the end of the first quarter, Munder Capital Management owned nearly 1.4 million shares of Dell, down from about 2.9 million shares at the end of last year, according to 10-K Wizard Technology LLC, a provider of research on Securities and Exchange Commission filings.
Sebastian Thomas, head of U.S. technology research for RCM Capital Management LLC, is doubtful that any one course of action will solve Dell’s problems right away. Mr. Thomas, who helps RCM manage $127 billion world-wide, says Dell should get more aggressive to boost sales in emerging markets and could invest further in industrial design to recapture high-end PC buyers. RCM owned more than 1.7 million shares of Dell at the end of the last year’s fourth quarter, according to the latest SEC filings, down from 2.3 million shares in the third quarter.Even with such actions, Mr. Thomas says that, until Microsoft Corp.’s new operating system software, dubbed Vista, hits the market starting later this year, pricing is the only lever Dell can pull to fend off these challenges. That is because Dell is boxed in by shifts in the PC market, he says.The majority of Dell’s growth comes from the mature U.S. PC market, for one. Meanwhile, U.S. consumers appear more willing to buy at retail stores, where Dell has hardly any presence.