Dell Inc. - still a growth company?

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Dell Inc.- still a growth company?

• Stefan EisnerDecember 1, 2005

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Outline

• Company Facts
• Portfolio Position
• Business Strategy key tenets
• Segmentation by product geographical
• Industry current developments
• Stock Facts
• Valuation
• Recommendation

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History

• Michael Dell founds Dell Computer
  Corporation simple concept selling computer
  systems directly to customers
• 1987 International expansion -gt opening of
  subsidary in UK
• 1988 IPO (3.5m shares at 8,50 each)
• 1989 Company introduces first notebook computer
• Opened manufacturing center in Limerick,
  Irland -gt serve European, Middle Eastern and
  African Markets
• 1993 Joins ranks of the top-5 computer system
  makers worldwide
• 1997 Dell introduces its first workstation
  systems
• 1998 Dell introduces its PowerVault storage
  products
• 2000 Company sales via Internet reach 50 million
  per day
• 2001 For the first time, Dell ranks No. 1 in
  global market share
• 2003 Dell enters consumer electronics

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Company Facts

• Headquarter Round Rock, Texas
• Chairman of the Board Michael Dell
• CEO, President Kevin B. Rollins
• Revenues last four quarters 54,182m
• Net Income last four quarters 3,565m
• Broad range of products services
• Enterprise systems (servers, storage,
  workstations, networking products)
• Client systems (notebook, desktop computer
  systems)
• Printing and imaging systems, software and
  peripherals and global services
• Employees 63,700
• Financial Year End January

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Portfolio Position

• Bought 500 shares at 41.75 on 12/10/99
• Cost of position 20,875.00
• Closing price 11/30/05 30.151
• Value of position 15,075.50
• Change -5,799.50 (-27.78)
• Reviewed on December 2002 and November 2004
  (Hold)
• of Portfolio 5.31
• Jack Henry and Macrovision are also in the
  Technology Sector

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Business Strategy key tenets (I)

• Direct relationship is the most efficent way to
  the customer
• Dells direct business model eliminates
  wholesale and retail dealers
• No expenditures associated with the retail
  channel
• constant flow of information about customers
  plans and requirements
• enable Dell to continually refine its product
  offerings
• Custom-built products and custom-tailored
  services
• Build-to-order manufacturing process
• Turn over inventory every 4 days on average and
  reduce inventory levels
• Rapidly introduce the latest relevant technology
• Rapidly pass on component cost savings directly
  to customers

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Business Strategy key tenets (II)

• Low-cost leader
• Efficient supply chain management and
  manufacturing organization
• Concentration on standards-based technologies
• Direct business model
• Pass those savings to its customers
• A single point of accountability for its
  customers
• Offers an array of services
• Standards-based technologies deliver the best
  value to customers
• Provide customers with flexibility and choice
• Benefit of extensive research and development

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Sales Marketing

• Channels of Distribution
• Sales representatives
• Telephone-based sales
• Online sales through www.dell.com
• Marketing programs for specific customer groups
• Large business institutional customers
• Field sales force, account teams (system
  engineers and consultants)
• Small-to-medium business consumers
• Advertising on television, Internet, print media
  and by mailing publications
• Dell Direct Stores view Dell products in person
  and purchase with assistance
• Goverment, healthcare and education market
• Specific sales and marketing programs

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Manufacturing, Materials Supply RD

• Manufacturing
• Build-to-order manufacturing process
• Process consists of assembly, software
  installation, functional testing and quality
  control
• Locations US(3), Brazil, Ireland, Malaysia,
  China
• Materials Supply
• Large number of suppliers
• BUT Intel Corporation as a sole source supplier
  of processors and Microsoft sole source supplier
  for various operating systems and application
  software products
• RD
• Very low expenses 464m for fiscal 2005 (0.94
  of Revenue)
• HP (4.3), IBM (5.9), Sun (16.3)
• Company uses partners (e.g. Intel, Microsoft,
  EMC, Lexmark) to develop technology

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Segmentation by product services categories

• Beginning Q1-FY06 supplemental revenue reporting
  by product services
• Q3-FY 06 (total revenue 13.9 billion)

• Desktop PCs still most important, but
  decreasing

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Segmentation by product services categories

• Beginning Q1-FY06 supplemental revenue reporting
  by product services
• Q3-FY 06 (total revenue 13.9 billion)

• Desktop PCs still most important, but
  decreasing

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Geographical Segmentation
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Geographical Segmentation
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Dells Market Share PCs
Based upon IDC Worldwide Quarterly PC Tracker
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Industry current developments (source report
Mintel cooperation)

• Demand for Mobility
• First time in April 2005 laptop sales surpassed
  desktop sales
• Increasing broadbrand penetration
• Consumer use their computer more and more for
  multimedia activities
• Declining Prices
• Increasing number of units shipped, but declining
  overall revenues
• Average computer prices fell nearly 35 between
  2000 and 2005
• Prices have continued to fall, especially laptop
  prices
• Low Cost defining aspect of competition
• Most important advertising in newspapers
  circulars
• Chinese imports continue to grow
• leading computer equipment importer to the U.S.
• From 11.9 billion (2002) to 29.5 billion (2004)
  147.9
• Lenovo, a chinese company, bought IBMs PC
  division in early 2005
• Municipal wireless infrastructure drives notebook
  sales
• 100 cities implementing wireless infrastructure
• 1000/- cities working on plans for wireless
  Internet networks

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Industry US Home Computer market forecast
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Share Buyback

• YTD have repurchased 138 million shares
• More than 3x the stock options Dell expect
  to grant for the full year
• Plan to spend at least 1.7 billion in Q4
• Will continue in the future, because Dell
  has a high Free Cash Flow, but very few
  investment opportunities
• OR Dell will start to pay dividends

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SWOT a overview
S
W

• Leading market position
• Notable clientele (large companies, state
  goverments)
• Superior business model
• Strong operating performance
• Cash Cow
• No traditional pension plans
• Partnership with Microsoft (creating single tool
  managing hardware and software)

• Single source suppliers
• Low RD spending
• Poor customer service
• Problems in China

• INDUSTRY
• Growth in the digital color printer maket
• Sale of IBMs PC Business to Lenovo (Europe/US)
• Trend to more modular, standard products and
  clusters of less expensive machines
  (serverstorage)
• COMPANY
• Printer Replacement business
• Expansion of product portfolio (consumer
  electronics)
• International Expansion
• Entering new markets through partnership

• INDUSTRY
• Decreasing PC prices
• Desktops revenues will decrease heaviley until
  2010
• Porters five forces - High Industry Rivalry
  - High Bargaining Power of Buyer
• New CEO at HP -gt cost reducing
• Sale of IBMs PC Business to Lenovo (Asia)
• Asian No-Name producer
• Increasing component prices

O
T
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Competitors















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Stock Facts

• Share price 30.15 (52-Week range 28.62-42.57)
• Market cap 72.29B
• Trailing P/E 23.32
• Forward P/E (fye 28-Jan-07)16.94
• Dell has never paid a dividend
• Sector Technology
• Industry Personal Computers
• held by Insiders 9.85
• held by Institutions 65.5
• Ticker DELL

Source Yahoo!Finance 11/30/05
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Stock Performance last 5 years
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Stock Performance last 2 years vs Competitors
Vs Hewlett Packard, IBM, Gateway
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Valuation - Beta
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Valuation 3 Scenarios

• Verification of Forecast and Assumptions of
  Segments by
• Calculating ratios
• Computing Implied Growth rates of Geographical
  segments
• Reviewing sales development

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Valuation sensitivity analysis (normal)
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RECOMMENDATION - Considerations
HOLD largest geographical segment (American Business Units) growing and operating margin increases Growth opportunities outside the US Still superior business strategy Expansion to higher margin products (printer replacement, storageservers, business customer) Share buyback Almost no debt After the decrease in the stock price, lower growth rates are partially contained in the price SELL Other geographical segments only flat or negative Operating income growth Problems in China, UK Increasing rivalry by Asian companies pricewar desktops and mobility products, which are almost two thirds of the revenue no further investment opportunities No long term-guidance of the company historic high double digit growth rates are improbable
Source Yahoo!Finance 11/30/05
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RECOMMENDATION - SELL

• SELL the entire position of Dell shares (500)
• DCF only slightly above actual share price
• High level of uncertainty about Dell futures
• Diversification of product portfolio and further
  expansion outside the US CAN be successful, but
  it MUST be successful to maintain high growth
  rates
• No guidance of the company for next year
• Still a growing company, but the high growth
  rates of the past are improbable
• If we follow our investment approach, there are
  better companies to own

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Question Comments
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Desktop Products

• Desktop Computers
• Optiplex line corporate, institutional and small
  business customers
• Dimension line small businesses and home users
• Desktop Workstation
• Precision Line professional users demand
  exceptional performance
• Cash-cow/ mature business (especially in the US)
• No. 1 DesktopsWorldwide market share 18,7
  (Q2-CY05)

Q2 Growth-Rate 2 Unit Growth-Rate 17
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Mobility

• Notebook Computers (majority of revenues in this
  segment)
• Latitude line addresses business
  organizational needs
• Inspiron line small-medium sized businesses,
  individuals
• No. 1 worldwide Market share 18,5 (Q2-CY05)
• Mobile Workstation
• Precision Line professional users demand
  exceptional performance
• MP3-Player (DJs) PDA (Axims)
• MP3-Player
• Notebooks selling much faster than desktops

Q2 Growth-Rate 20 Unit Growth-Rate 47
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Software Peripherals

• Dell Branded
• Printers, monitors, plasma and LCD television,
  projectors
• Third party
• Printers, software, digital camera and other
  products
• Printing Imaging Systems
• Dell started selling Printers in 2003
• Majority of Printers are based on Lexmark
  Technology
• Extremly aggresive prics for printers
• build market share in the higher-margin toner
  replacement business (2/3 of HPs operating
  profit)
• All printers feature Dell Ink/Toner management
  system software
• Unit growth Year-over-year second quarter 77
  (No. 2 in the US)
• Digital Home Entertainment Market
• Diversification of Dell traditional markets
• Sucess important for growth

Q2 Growth-Rate 35
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Servers Networking

• Servers (majority of revenues in this segment)
• PowerEdge line industry standard servers (x86
  architecture)
• No. 2 worldwide Market share 27.8 (Q2-CY05)
• Networking Products
• PowerConnect switches
• Competitive prices to create additional sales of
• storage products
• Higher margin enhanced services

Q2 Growth-Rate 9 Unit Growth-Rate 25
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Enhanced Services

• Managed Services
• IT management services
• Professional Services
• Help business utilize emerging technology
• Deployment Services
• Configure and deploy Dell systems and products
  intoIT environment
• Support Services
• Varietey of customized services and support
  programse.g. warranty upgrades and services
• Training and Certification Services
• Online training programs and IT certification

Q2 Growth-Rate 41
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Storage

• Strategic allicance with EMC
• Dell/EMC storage products
• 2001 5-year alliance 2003 extended for
  additional 2 years
• Own line
• Dell PowerVault
• Products
• External storage, tape backup products, network
  attached storage, fibre channel array, storage
  area networks and rack solutions

Q2 Growth-Rate 26