Annex Newsflash 2005-27                          August 12, 2005



Updated 8/12/05, 5:10 PM PDT (adds charts, forecast)

Analysis of Dell's Second Quarter Results 

Dell Spooks Street

Wall Street Heads South Although Dell Results Point North 

PHOENIX, Aug 12 - Forget IBM, HP, Microsoft... Dell is the new IT bellwether stock.  The Texas-based PC maker did it again.  Dell rang the bell last night with its second quarter results just as it did back in May, signaling a tech stock rally that lasted almost three months (see "Dell Rings the Bell," May 2005).  This time, however, the market headed south at the sound of the Dell bell, led by an 8% decline in Dell shares.  

Why?  Because Dell's revenues increased by "only" 15%, as opposed to 17% - the growth Wall Street had expected.  So instead of admitting that its research was faulty, Wall Street is finding fault with the company whose growth outpaced that of all of its major competitors.

Never mind that Dell's EPS (earnings per share) jumped by 32%.  Never mind that Dell's operating profit surged by 17%.  Never mind that Dell's physical shipments soared by 25%.  Never mind that Dell's overseas revenues rose by 24%.  Never mind that Dell's services revenues skyrocketed by 41%; that its software and peripherals business increased by 35%; and that its storage revenues rose by 26%.

In short, never mind that ALL of Dell's business units and segments pointed north at varying angles and double digit rates.  Wall Street still headed south because Dell's overall revenue growth missed its forecast by two points.  

That's spooky.  Teenage mood swings make more sense than that.  Except that their nervous energy doesn't cost tens of billions of dollars in market cap losses.

Worries that Dell's woes are a symptom of sluggishness in the broader market sent its rivals lower: Gateway fell 13 cents, or 3.4%, to $3.72.  Hewlett-Packard slipped 40 cents to $23.78, while Apple Computer lost 43 cents to $43.57.

PC makers weren't the only companies impacted by Dell's report: Intel, which makes chips for Dell computers, fell 46 cents to $26.36, while software maker Microsoft shed 25 cents to $27.02.  IBM also dropped 58 cents to $82.18.  And the overall market (Dow) was down in mid-day trading morning by more than 100 points.

Dell's a Bore?

Hm... I wonder what's author of an excellently-written piece, published in advance of Dell's release last night, now thinks of the company about which she wrote:

Dell Is the Bore of the Century

By Monica Rivituso
August 11, 2005


It is a model of efficiency and a profit machine. It has single-handedly revolutionized the PC business. It's also about the most predictable, tedious company in the entire tech sector. There, I said it.

This might seem blasphemous considering that Dell has cranked out impressive profit and revenue growth for, like, a thousand consecutive quarters. The stock remains a core holding in every tech investors' portfolio. Books have been written about Chairman Michael Dell's innovation. He invented electricity, was the first to slice bread and cured polio. He makes Henry Ford look like a loafer.


When Dell posts second-quarter results after the close on Thursday, lots of tech investors will be watching, but I won't be one of them. Honestly, after years of studying the company's  quarterly reports and listening in on conference calls, there's really no need. Here's what will happen: The manufacturing dynamo will at least meet, if not top, Reuters consensus estimates of 38 cents a share on $13.7 billion in revenue (compared with 31 cents a share on $11.7 billion in revenue a year ago). The company will back third-quarter guidance, maybe sprinkle in some optimistic comments.

Then management will wax eloquent about the company's continued market share gains and its opportunity to gain even more share in the future at the expense of the usual suspects: Hewlett-Packard (HPQ) and Gateway (GTW). Is any of this news? Market research firm Gartner already estimated that Dell accounted for 17.9% of world-wide PC unit shipments in the second quarter — up from 16.6% a year ago. Dell is king of the world. We get it.

(click here to read the rest of the story)

Well, Wall Street evidently doesn't get it, Ms. Rivituso.  Not even after Dell tacked on another point in market share gains to its crown (it is now up to 19%).

Dell vs. EDS: A Study in Contrasts

As we noted back in March, Wall Street usually gets it if it looks at IT companies upside-down (see "An Upside-Down View," Mar 2005).  Dell and EDS, the two blue Texas high-tech roses, a case in point.  They are a study in contrasts, especially when it comes to Wall Street treatment.

Dell vs. EDS    
  Dell EDS Texas rose
Revenues-2Q05 15% -1%


  5-yr growth 14% 1% 14
  10-yr growth 30% 5% 6
  Last 5 years $202,910 $121,823 2
Earnings-2Q05 32% -90%  
  5-yr growth 13% -20%  
  10-yr growth 36% -9%  
  Last 5 years $12,154 $608 20
  Source: Annex Research

As you can see in the above table, Dell's revenues increased by 15% in the latest quarter, while EDS's declined by about 1%.  Dell's earning's were up 32%, while EDS's dropped 90%.  And so on... 

And now take a look (above) at how Wall Street treated the two Texas roses in the last six months.  The incongruity between the stock prices and business results was especially pronounced in the last few days.  EDS shares are up; Dell's are down.  

Long-term business comparisons are even more favorable to Dell.  The PC company outsold its Texas rival by almost 2-to-1 in the last five years.  Dell earned 20 times more money than the erstwhile world leader in IT services.  The PC maker's revenues outpaced those of EDS 14-fold in the last five years, and  6-fold in the last decade.  And while Dell's earnings grew by 13% and 36% compound annual in the last five and 10 years respectively, EDS's declined by 20% and 9% respectively during the same periods.

So why the stock market incongruity?  Faced with dismal sales results, EDS promised a better tomorrow when it announced its second quarter results (see "Mañana Banana," Aug 2005).  Wall Street believed it even though EDS has broken many of its other commitments in the past.

Dell delivered the future today, and promised to keep growing to about $80-billion company over the next three to four years.  It has met or exceeded most of its forecast in the past, as you saw from that article.  Yet Wall Street focused only on the missed revenue expectation in the last quarter, and sold off the stock.

Over the long haul, however, the Dell stock has outperformed that of its cross-state rival's by several thousand percentage points (see above chart).  Investors may want to keep that in mind before dumping Dell's shares in knee-jerk reactions, while loading up on EDS's.  That's like dismounting a Smarty Jones, and saddling up a nag instead.

"Dell Is a Bore of the Century"?  Maybe in a perverted, upside-down world of Wall Street.  But not on Main Street.  And certainly not in global IT thoroughbred races.

Annex Clients: Click here for detailed Dell FY06 forecast

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT: Dell Spooks Street (Aug 2005); EDS Ups Its Forecast (Aug 2005);  Capgemini Beats Forecast (July 2005);  Fujitsu: Losses Reversed; Forecast Upgraded (July 2005);  IBM: Polaris Eclipses T-Rex (July 2005);   IBM Bounces Back (July 2005); Accenture: Smashing Records (July 2005); Merrill's New Bull (EDS) (May 2005);  IBM Trumps Trump (May 2005);  Tweaking Big Blue (May 2005); Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Fujitsu Revenues Flat, Lower Net (Apr 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);  Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use "financial engineering" or similar  keywords.

Volume XXI, Annex Newsflash 2005-27
August 12, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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