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Dell Computer Corporation (DELL) Message Board

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  • o08o.ugh64w o08o.ugh64w Aug 30, 2012 7:17 PM Flag

    Micheal Dell to take private before Win8 PC upgrade cycle

    I agree with you to a large extent, however, there are some issues with Dell.

    1. Debt - Dell is carrying quite a bit. Granted, there's more cash than debt, but debt/equity at 0.86 is still quite high. Why carry $8.4B debt if you have $11.4B cash? We all know that with interest rates near zero no money is being made on the cash, yet interest is being paid on the debt. There's no need for keeping that amount of cash in this environment, unless the company is scared that it may well need that kind of cash hoard. If not, and they aren't going to pay down debt, then pay it out to shareholders.

    2. EPS is being engineered with stock buyback - we all know this. Granted, lots of companies do it these days (e.g. IBM and Exxon), but it's about as good as cutting expenses to make your numbers. Sales are falling and without the buyback, EPS would be falling as well.

    3. Goodwill + intangibles is pretty huge. On the one hand, Dell is doing the right thing making some acquisitions and diversifying the business. However, I think they may be overpaying to some extent. Much of that goodwill is going to have to be written down, and it will take a toll on EPS. Lots of people will say that goodwill writedowns are non-cash charges and so it's not a big deal. But, it is a big deal, because we still have the long-term debt to show for it.

    I am a firm believer that at some point Michael is going to step in and take the company private should the stock continue lower. But, do you invest knowing that Michael is the backstop, or do you buy because you believe the stock is undervalued and should be trading much higher? To be honest, I don't want to throw my money down at $10.75, watch it fall to $6, and then have Michael step in and buy the whole thing for $8.

    The stock was higher when Michael made his massive purchases last year. Yes, business is slightly down, but as you rightly point out, there's only so much you can do on i* devices. i*devices cannot run enterprise infrastructures, Dell can. And no matter what devices you use on the go, at home you still need a desktop machine of some sort. You can't easily do word processing, spreadsheets, and taxes very well on your i* device and likely won't be able to for some time. As good a system as Linux is, it is not for most home users - Wintel still has great advantages. And, as good as Apple is, most users still choose Wintel because they get more for their money. Gamers will still want/need high end performance, peoples home theaters will need home theater appropriate machines, and the PC is not going to disappear. I think there will be some consolidation due to lower demand, and less frequent upgrade cycles among home users, but the PC is definitely not disappearing, and the majority of home users are not going to be slapping together their own machines - not when Dell is around.

    Anyhow, I'll likely wait for the price to stabilize, then purchase some. It almost seems that the stock has to dip below $10 at this point.

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    • 1. Most cash are oversea and needed to pay tax ~30% (my guess) if bring them back to US, so it's more efficient to borrow against it at interest rate of 3-4% (the interest is tax deductible). In fact, this is what Whitney Tilson suggested Microsoft to do and buy back more shares if my memory was right. This can maximize shareholder's value.

      2. At p/e below 10, buyback is a very good use of the cash. It's at 10%+ yield, dude...(it's a much better deal now)

      3.There are two ways to valuate a company 1) using balance sheet items, 2) using discounted free cash flow in the future. It's pretty hard to use balance sheet items; in fact, I think you can only get reliable estimation with financial companies because their balance sheet items have market quotes easily. That means you need to look at the cash flow of the company, and man, it's at like 15-18% yield...When you look at the debt, you have to look at it in the context of the free cash flow. It's not small but it's not big either. Since the free cash flow already counts the interest expense, you can see it's still 15-18% yield on current stock price.

      In case you don't know, Michael Dell has a net worth of about 3 billion in dell stocks and over 10 billion in his hedge fund. He absolutely has the financial resource to take the company private, the problem is if he wants to. He is a man full of ego, so if the price drops enough, I believe he will. I hope he does not do it, since Dell stock has much more upside than his offering price, I am sure.

      Sentiment: Strong Buy

    • Agreed. Goodwill is 6b, pretty high. I have iPad and iPhone but need a pc at work and home to get xls and biz related tasks done. Selling puts for 9.4 entry point right now. 3% div in third qtr at those levels.

    • Thanks for the well-reasoned reply.

    • " To be honest, I don't want to throw my money down at $10.75, watch it fall to $6, and then have Michael step in and buy the whole thing for $8."
      I read very often, that Dell has wasted a lot of shareholder value, because Dell bought back shares to high prices - in average. Your case, quite the opposite, but may be.
      It's a question of probability, I think