Dell : a business in transformation

Dell operating segments

Enterprise solutions
This business is the growing higher margin segment of Dell. They put all hopes on this segment. It grew 14% this year (excluding storage) and they want to fuel this growth in the next years thought acquisitions. A 10% planned growth could be a good expected growth. Cash will be required thought and I do think it can be provided by the declining businesses.

Software and peripherical
This business is tightly attached to product sales. It includes all ‘add on’ that you may include in your computer purchases. If, sorry when, the pc business will be at 0, this one will follow. Assuming a 15% decrease a year is a plausible scenario.

Mobility
This segment represents laptop and other mobile devices. This is a rapidly declining business due to competitors aggressiveness in prices and products. I do think dell missed the emerging market opportunity that existed in the previous years by keeping high margins and high quality. Higher quality products ( read apple ) got the high-end market and massive lower grade products ( read acer, asus, Lenovo ) captured the low end. They are left with the middle class eroding fast to competitors. The drop is brutal at a major 20% decrease annually. I do assume it will stay this way.

Desktop
While this business line is declining, general public and corporate still order Dell products to fill their home and business with fixed computers. It does goes down, but mainly in prices and not in number of units. It is a good thing assuming warranty services and software segments are closely linked to this segment. I do assume it will go down at a 10%/year rate.

Balance sheet

The 3b net cash is reassuring at first glance but if you look only at last year acquisitions, we shouldn’t be. The acquisition frenzy is on going at the billions dollars shotgun. Will it turn out to be positive? Only future can tell. The current manager now is Michael Dell. He is back for the future. He will try to ‘recreate’ Dell. Will he burn the balance sheet or create a wonderful, cash machine?

Expected profitability

So I am rapidly going into the expected profitability.

Enterprise solutions Enterprise services Software & Peripherals Mobility Desktop PCs Total
Revenues
2012 10 456 8 354 10 272 16 212 13 340 58 634
Yearly change -10% 10% -15% -20% -10%
2013 9 410 9 189 8 731 12 970 12 006 52 307
2014 8 469 10 108 7 422 10 376 10 805 47 180
2015 7 622 11 119 6 308 8 301 9 725 43 075
2016 6 860 12 231 5 362 6 640 8 752 39 846
2017 6 174 13 454 4 558 5 312 7 877 37 376
Profit Margin 18% 30% 18% 18% 18%
Gross margin
2013 1 694 2 757 1 572 2 335 2 161 10 518
2014 1 524 3 033 1 336 1 868 1 945 9 705
2015 1 372 3 336 1 135 1 494 1 750 9 088
2016 1 235 3 669 965 1 195 1 575 8 640
2017 1 111 4 036 820 956 1 418 8 342
Operating expenses 15% 15% 15% 15% 15%
Net profit
2013 282 1 378 262 389 360 2 672
2014 254 1 51 223 311 324 2 628
2015 229 1 668 189 249 292 2 627
2016 206 1 835 161 199 263 2 663
2017 185 2 018 137 159 236 2 736

As you have seen, this is more of a fast first-glance analysis. I think it will help me figure out if I start a position in Dell and continue monitoring the progress or simply pass. A lot of these estimates is exactly what it is named for : guesses. I assume a need for margin of safety with these calculations at least 50%. A lot could go wrong.

Competitors in services are quoted at a P/E around 15 to 20. I assume DELL isn’t worth that until the transformation is complete. Lets assume 50% discount so between 7.5 and 10.

We could get 20b to 27b market value plus net cash of 3b for an expected share price between 13 and 17. We get a 37% to 80% upside.

I think a small investment could be worth the reward.

Disclosure : Author is long DELL.

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