Stock of the Day
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Dell Inc. (DELL)
Dell Profit Falls, but Beats Estimate
Over the last year, consumers have been flooded with disappointing news about the economy, layoffs, and declining revenue at companies. Consumers have also watched some of their favorite stores such as Linen & Things, Circuit City, and Sharper Image disappear as a result of poor sales. Dell surely won't meet that fate anytime soon, but the computer maker is having a tough time in a declining market. Dell Inc. reported a sharp drop in first-quarter sales and earnings Thursday amid a 34% drop in PC sales. The company reported that its first-quarter earnings tumbled 63%, and sales dropped 23%. Why have shares of Dell risen over the last 3 months? What does the future look like for the second-largest PC Maker?
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| Stock Analysis |
Since the start of the first-quarter shares of Dell have risen nearly 35%. Investors appeared confident that the technology sector was making a turnaround and as a result shares of tech companies started to improve. The problem here is that Wall Street has been receiving mixed signals from the industry. Some tech companies have projected that sales will continue to decline in the coming months while others are stating that demand and sales have returned to normal. Dell's results barely exceeded analysts' earnings forecasts even after factoring in a number of elements that weighed on earnings during the last quarter. The declines were not centralized to one specific division, but were largely due to the company's dependence on computer sales. That particular business provides nearly 80% of Dell's revenue. The global recession has caused individuals and businesses to rethink purchasing computers and that is severely hurting Dell's bottom line. Dell also reported that large enterprise revenue fell 31%, and small to medium business sales fell 30% in the quarter.
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The future for Dell is unfortunately a grim one. Some analysts are suggesting that the company must prepare itself for a prolonged downturn. The bulk of the computers that Dell manufactures utilize Microsoft's (MSFT: Charts, News, Offers) Vista operating system, which is not popular among consumers and especially businesses. CEO Michael Dell agrees that a total turnaround in the technology sector is at least “9 months to a year out.” However, he is confident that demand for computers will quickly make a turnaround once Microsoft and Intel (INTC: Charts, News, Offers) start rolling out new products. That all sounds nice, but the reality is that consumers will not start purchasing unnecessary items until they are sure that the economy is heading in the right direction. Until that happens, Dell has started taking some steps to help prevent profits from totally reaching rock bottom.
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Dell has initiated a cost-cutting strategy to eliminate some unnecessary costs. The company reported in February that it had already started a campaign to eliminate $1.8 billion in operating expenses. Dell boosted its 2011 cost-reduction target to $4 billion from $3 billion. Dell chose to cut its overall headcount by more than 9,000 jobs last fiscal year. Dell has also decided to outsource some of its manufacturing to cut costs. New acquisitions are being evaluated on a constant basis as the company seeks to grow during these tough times. New talent has been hard to come by for the company. Its recent attempt to lure away an IBM (IBM: Charts, News, Offers) employee resulted in a law suit.
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Dell definitely has a steep hill to climb in the coming months. If sales keep declining, the company will most likely lose that number two spot. Unfortunately, the company's success depends on how long the economy and the pc market take to start heading in the right direction. Shares of Round Rock, Texas-based Dell rose 1.4 percent in extended trading after closing up 3.2 percent at $11.48 on Nasdaq.
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Profile |
Click here to view a detailed profile of Dell Inc..
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