Matching Dell

Matching Dell

Case Commentary by C3

Nathan Lyons-Smith, Brilliant Manyere, Bill Green

11/18/2009

Contents

Executive Summary ....................................................................................................................................... 3

Background ................................................................................................................................................... 4

Problem ......................................................................................................................................................... 4

Financial Analysis .......................................................................................................................................... 4

Market Pricing Analysis ................................................................................................................................. 6

Segment Analysis .......................................................................................................................................... 7

Dell's Competitive Advantage ....................................................................................................................... 7

Conclusion ..................................................................................................................................................... 9

Appendix 1 – FY 1998 Inventory Turnover and Days in Inventory Ratio Analysis ...................................... 10

Appendix 2 – Profit Margin Ratio Analysis .................................................................................................. 10

Appendix 3 – Average Monthly Rate of Change of Dell Stock 1996 - 1999 ................................................ 10

Appendix 4 – FY 1996 Competitive Advantage Analysis ............................................................................. 11

Appendix 5 – FY 1998 Competitive Advantage Analysis ............................................................................. 12

Appendix 6 – SWOT Analysis of Dell ........................................................................................................... 13

Appendix 7 – Dell DuPont Analysis ............................................................................................................. 14

Appendix 8 – Dell Market Value Analysis ................................................................................................... 15

Appendix 9 – Dell Income Statement ......................................................................................................... 16

Appendix 10 – Dell Balance Sheet .............................................................................................................. 17

Appendix 11 – Dell Sources and Uses Statement ....................................................................................... 18

Appendix 12 – Selected Financial Statements as a Percentage of Sales .................................................... 18

Appendix 13 – Calculation of Beta .............................................................................................................. 19

Appendix 14 – Calculation of Discount Rate ............................................................................................... 20

Appendix 15 – S&P 500 Returns ................................................................................................................. 21

Appendix 16 – Dell Monthly Stock Price ..................................................................................................... 22

Appendix 17 – Beta Estimation of Dell Computer ...................................................................................... 23

Executive Summary

Dell has been incredibly profitable and experienced astounding growth over the last several

years. We are now in 1999 and we must decide if we should buy, sell, or hold Dell stock.

Strategically, Dell has run the table on the market. They have capitalized on a new business

model and forged their profits in an industry with very slim profit margins. They benefitted greatly from

the expansion of computer use in the late 90s, the explosion of the internet, and the health of the

economy. Dell's competitive advantages come from:

1. Just In Time (JIT) purchasing of components (avoiding falling prices)

2. Lower inventory costs (avoiding carrying and inventory costs based on cost of capital)

3. Distribution channel related costs and markups (which increases prices to the customer)

Dell's startup mentality and lean business operations have made it a great company. Their inventory

turnover ratio is around 52 and they keep their inventory for an average of only 7 days. These are

astounding figures for any company and Dell will have to work very hard to leverage JIT and their

distributor network to ensure they remain at this level. Now, the market for new computers has slowed

down because everyone has one. Dell has fewer growth options and its stock likely will not continue to

grow at the same rate. Additionally, profits continue to remain razor thin, new companies can enter

easily, and Dell must continue to run its operations tightly if they wish to continue making a profit. Dell

has traditionally targeted its products to a small number of segments. Future success for Dell will

involve breaking into new segments that are controlled by its competitors, IBM and HP.

Financially, Dell is in a very good position. After collecting relevant data, we conclude that the

estimated value of Dell stock is $46.83 per share. Dell has traditionally not paid dividends for a reason.

Our opinion is that the company's earnings will stabilize in 2004. Long term investors of stocks are

encouraged to accumulate the company stock and hold for about four years.

Background

Dell emerged in the mid-1980's, during a period of unimaginable expansion in both the

popularity and purchasing of Personal Computers. During the late 1990's, personal computer purchases

soared as a result of lower prices, easy availability, and the rise of the internet. Just about every family

bought a PC for use at home and many jobs began involving computer skills at the work place.

Consumers were demanding PCs and Dell burst on to the scene with its direct to consumer business

model and grew rapidly. Before Dell, computers were delivered to customers through three channels:

1) Retail Stores 2) Distributors (smaller resellers) 3) Integrated Resellers

Dell quickly exploited a fourth avenue, direct sales to the customer. This strategy enabled Dell

to hold less inventory, improve customer satisfaction, and also increase their ability to provide custom

configured machines in a timely fashion. Previous customizable computers were bought through IBM.

IBM was selling the "Model 0", a barebones computer, delivered to an intermediate who would load the

computer with the desired options. This created transportation and logistics costs and increased lead

time. Dell's model was a switch in paradigms, and it worked. In 1998, Dell was selling mainly to

businesses and the government (77% of sales). At this time, this segment was purchasing just over 42%

of all PC's in the U.S. Dell began selling to everyday people and their profits soared further.

Problem

Dell has been highly profitable and grown incredibly until this point. Will they continue to be as

profitable and achieve similar levels of growth? Should we buy, sell, or hold Dell stock? The following

analysis will analyze Dell's situation and present a recommendation.

Financial Analysis

In FY 1998, Dell's Inventory Turnover ratio was 51.78, which was five to