Dell Inc. (DELL): Stay as Far Away as Possible

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Hewlett-Packard Company (NYSE:HPQ)’s PC sales from the most recent quarter fell 20%, while its printing unit was down 1% from the same quarter a year ago. Hewlett-Packard Company (NYSE:HPQ) remains the number one PC vendor, but continues to face stiff competition from Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) and Dell Inc. (NASDAQ:DELL), in a market that demands a paradigm shift from the traditional personal computers. Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) acquired the International Business Machines Corp. (NYSE:IBM) PC unit in 2004 for $1.75 billion in 2004. International Business Machines Corp. (NYSE:IBM)’s decision to sell its PC unit could prove to be one of its best, especially now that it is also robbing HP of a huge chunk of the computer server business.

International Business Machines Corp. (NYSE:IBM) has since become a great consulting firm, something Michael Dell sees as  the future of Dell Inc. (NASDAQ:DELL), and a goal he wants to achieve by taking the company private. On the other hand, Carl Icahn believes that there is tremendous value in the company’s investments in cloud-computing, and believes that this value can be unleashed while still being a public company. The PC industry is not going to turnaround overnight.

Performance and valuation

Dell’s most recent earnings fell by 79.5%, while revenue was down 2.4% from the same quarter last year. The company’s profit margins stand at 3.3% compared to Lenovo’s 1.88%, while HP’s net loss margin is pegged at 11.6%.

However, HP’s gross margin superior to Dell’s and Lenovo’s, at 24%, compared to 21% and 12% respectively. HP’s operating margin is still the best among the three companies at 8%, compared to Dell’s 5% and Lenovo’s 2%.

At a price of $13.34, Dell trades at a Price/Earnings (P/E) multiple of 12.61 times its earnings. The forward P/E of 10.76 is indicative of the company’s declining appeal to investors, as uncertainty over its future continues to grow. A negative earnings growth rate for the most recent quarter does not help the valuation, as investors wait for the July 18, shareholder vote.

The bottom line

With Dell’s PC business diminishing along with the industry, there is definitely a need for change. However, the manner in which this change is being implemented worries me. The two rival parties pushing for a takeover seem to have some hidden interest, aside from just turning the company around. For instance, Michael Dell’s offer seems to discount the benefits associated with the company’s investment in cloud business, while Icahn is accused of lack of commitment. The company’s fundamentals are not the best either, among its rivals.

The article Dell: Stay as Far Away as Possible originally appeared on Fool.com is written by Nicholas Kitonyi.

Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nicholas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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