The last time I wrote about the investment merits of Dell (DELL) was six months ago on May 31st. At that time, Dell stock was trading around $28 and my piece entitled “Round Two from Round Rock: 8800 Layoffs at Dell“ concluded that the stock wasn’t quite cheap enough to peak my interest, and that a valuation range of $29 to $33 per share looked reasonable if the company did a decent job starting to turn things around.
Last week Dell hosted its first conference call in ages (they had refrained from issuing earnings numbers due to a probe into stock options practices) which was met with high anticipation but some disappointment due to lack of specifics as to forward guidance. The stock fell hard from the high 20’s to the mid 20’s and now sits at $24 per share. At these prices, I think Dell shares have limited downside and quite solid upside potential. Today’s announcement of a $10 billion stock buyback (repurchases were also halted as a result of the options investigation) only furthers that view.
I was vocal about my concern regarding Dell’s recently unveiled strategy of venturing into the retail channel due to assumed margin hits that will be taken to get their products into stores like Staples and Wal-Mart, but the company seems to have a renewed focus on efficiency and execution now that Michael Dell is back as CEO. I’m still not thrilled with the retail strategy (it seems like they are choosing market share over profits), but the company assured investors last week that the retail model is profitable for them, so investors can hope that a new customer base will also buy directly from the company in the future, should they like their retail purchases. Therefore, the company could ultimately benefit even more from the retail strategy down the road.
With Dell shares trading at only 14 times forward earnings estimates, I think the risk/reward in the stock is quite favorable at the current $24 quote. Upside of more than 20% seems reasonable over the next 12 to 18 months should they succeed in turning things around.
Full Disclosure: Long shares of Dell at the time of writing