Comments on: Round Two from Round Rock: 8,800 Layoffs at Dell http://www.peridotcapitalist.com/2007/05/round-two-from-round-rock-8800-layoffs.html Stock market and investing blog published by Chad Brand, Founder/President of Peridot Capital Sat, 11 Feb 2012 23:26:23 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Chad Brand http://www.peridotcapitalist.com/2007/05/round-two-from-round-rock-8800-layoffs.html/comment-page-1#comment-552 Chad Brand Fri, 01 Jun 2007 20:17:00 +0000 http://www.peridotcapitalist.com/?p=444#comment-552 David,<br/><br/>Why would a buyer pay a multiple on interest income plus the full amount of the cash hoard that is producing that income? If I have a savings account with $100 in it today, would you pay me more than $100 for that account because it was paying interest? If so, why?<br/><br/>As to the buyback issue, you have to account for the fact that the buyback is offsetting some options grants as well. So, $1 in buybacks will add less than $1 of value to Dell's earnings. <br/><br/>I agree that they will buyback more than they issue, so share count will continue to drop as it has in previous years, thereby creating value. But again, it's not going to be a 1-for-1 ratio unless Dell halts all options grants. David,

Why would a buyer pay a multiple on interest income plus the full amount of the cash hoard that is producing that income? If I have a savings account with $100 in it today, would you pay me more than $100 for that account because it was paying interest? If so, why?

As to the buyback issue, you have to account for the fact that the buyback is offsetting some options grants as well. So, $1 in buybacks will add less than $1 of value to Dell’s earnings.

I agree that they will buyback more than they issue, so share count will continue to drop as it has in previous years, thereby creating value. But again, it’s not going to be a 1-for-1 ratio unless Dell halts all options grants.

]]> By: David http://www.peridotcapitalist.com/2007/05/round-two-from-round-rock-8800-layoffs.html/comment-page-1#comment-551 David Fri, 01 Jun 2007 19:50:00 +0000 http://www.peridotcapitalist.com/?p=444#comment-551 I respectfully disagree with you about the $5 not adding $5 in value. Maybe a bit less but certainly not a multiple on the interest generated. Dell will use the cash for share buybacks once the SEC investigation is over, which, even if the stock is fairly valued, will boost EPS and the subsequent stock price, all other things being equal. In general, when thinking Buffet-like, i.e. "what is the company worth to a potential buyer," counting the cash as full cash is the right thing to do. I respectfully disagree with you about the $5 not adding $5 in value. Maybe a bit less but certainly not a multiple on the interest generated. Dell will use the cash for share buybacks once the SEC investigation is over, which, even if the stock is fairly valued, will boost EPS and the subsequent stock price, all other things being equal. In general, when thinking Buffet-like, i.e. “what is the company worth to a potential buyer,” counting the cash as full cash is the right thing to do.

]]> By: Chad Brand http://www.peridotcapitalist.com/2007/05/round-two-from-round-rock-8800-layoffs.html/comment-page-1#comment-550 Chad Brand Fri, 01 Jun 2007 13:23:00 +0000 http://www.peridotcapitalist.com/?p=444#comment-550 Hi David,<br/><br/>Thanks for pointing that out. Dell's cash is generating a lot of interest income which is contributing to the company's earnings to the tune of more than $300M per year, or about $0.15 per share. So while $5 in cash per share does not add $5 in value, you are right it would boost the valuation target, assuming they don't use any of that cash for buybacks in order to hit the earnings numbers. Hi David,

Thanks for pointing that out. Dell’s cash is generating a lot of interest income which is contributing to the company’s earnings to the tune of more than $300M per year, or about $0.15 per share. So while $5 in cash per share does not add $5 in value, you are right it would boost the valuation target, assuming they don’t use any of that cash for buybacks in order to hit the earnings numbers.

]]> By: David http://www.peridotcapitalist.com/2007/05/round-two-from-round-rock-8800-layoffs.html/comment-page-1#comment-549 David Fri, 01 Jun 2007 13:03:00 +0000 http://www.peridotcapitalist.com/?p=444#comment-549 Quick comment on your PE computations. You're forgetting the well-over-$5 in cash per share on the balance sheet. Add that to your valuations and you should probably see a stock in the 32-38 range. Pretty good, b/c that's exactly where Bill Miller said he sees the fair value of Dell. Nice work on the valuation! Quick comment on your PE computations. You’re forgetting the well-over-$5 in cash per share on the balance sheet. Add that to your valuations and you should probably see a stock in the 32-38 range. Pretty good, b/c that’s exactly where Bill Miller said he sees the fair value of Dell. Nice work on the valuation!

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