*NEWS*WALL STREET NOW IN LOVE WITH HP

[Anonymous]

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.

[Author]

May 16, 2006 at 11:40 AM