Annex Newsflash 2005-27 August 12, 2005
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 SmartMoney.com'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:
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.
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 SmartMoney.com 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.
Happy bargain hunting!
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)