DELL Dell Inc. (MM)

Since the company reported its first quarter 2012 results on May 18, 2011, there has been a huge variation in analyst estimates.

First Quarter Highlights

Dell Inc. (DELL) reported strong first quarter 2012 results, with earnings per share (EPS) of 55 cents exceeding the Zacks Consensus Estimate of 43 cents. Quarterly EPS was also ahead of the year-ago quarter earnings of 30 cents.

The company reported revenues of $15.0 billion, up 1.0% from $14.9 billion in the year-ago quarter. Revenue growth was driven by an improvement in the company’s Enterprise Solutions and Services.

Moreover, the company also witnessed decent growth in several key areas during the quarter including the Small and Medium Business, Asia-Pacific and Japan, and the Server business. However, total revenue remained below the company’s expectation due to slower growth in the Consumer business and weak sales in the Public sector.

Total sales from the BRIC countries (Brazil, Russia, India and China), which accounted for 27.0% of Dell’s quarterly revenue, were up approximately 18.0%.

Cash flow from operations increased to $465.0 million from $238.0 million reported in the year-ago quarter. The company ended the quarter with cash and short-term investments of $14.4 billion versus $14.3 billion in the previous quarter. Long-term debt stood at $6.8 billion at the end of the quarter compared with $5.1 billion in the previous quarter.

Dell expects revenue growth in the mid-single digits for the second quarter. For fiscal 2012, revenue growth is anticipated in the range of 5.0%-9.0% while non-GAAP operating income is estimated to grow in the 12.0%-18.0% range.

Agreement of Analysts

Over the last 30 days, 21 of the 30 analysts covering the stock have raised their estimates for the second quarter, while 4 analysts have made downward revisions. Moreover, for fiscal 2012, out of the 34 analysts providing estimates, 31 analysts raised their estimates while none moved in the opposite direction.

Some analysts are of the opinion that DELL’s Client business is aligned more toward Commercial than Consumer, which offers a higher growth potential. The company is also increasing its sales resources in the Enterprise segment in order to drive higher growth.

Additionally, analysts believe that expansion of the Enterprise mix in the company’s business portfolio and continued demand for DELL’s branded storage and services augur well for the company. A ramp in product line up based on Compellent technology will help the company deliver better margins in the future.

According to the research firm IDC, Hewlett-Packard Company (HPQ) was the leader in the PC market in the first quarter, with 18.9% market share, closely followed by Dell (12.8%) and Acer (11.2%). Dell’s market share inched up from 12.7% in the fourth quarter of 2011 to 12.8% in the reported quarter.

Some other analysts believe that lower component costs and decent pricing in the PC market helped gross margin in the quarter. Moreover, a better product mix also helped in improving margins.

Magnitude

The Zacks Consensus EPS Estimate for the second quarter of 2012 has moved up 4 cents to 48 cents in the last 30 days. For fiscal 2012, the Zacks Consensus EPS Estimate has increased 18 cents to $1.87 in the last 30 days. Likewise, for fiscal 2013, estimates have moved up by 13 cents to $1.89 in the last 30 days.

Our Recommendation

Dell reported decent first quarter results, with earnings per share (EPS) and revenues surpassing the year-ago quarter numbers. New products, a stronger services business, opportunities in the Electronic Medical Record sector, along with the introduction of Dell Streak were the achievements of the company in the recent past.

Moreover, the company is also deriving benefit from the higher mix of commercial business. Dell also benefited from the expanded customer base arising from the Perot acquisition. However, stiff competition from Hewlett-Packard and Acer concern us.

Dell holds a Zacks #3 Rank, implying a short-term Hold rating.

 
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