Valuation of Dell Computer Corporation

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Valuation of Dell Computer Corporation

• Nandita Singh

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Summary of Analysis

• Assigning a Hold .The company currently trades at
  roughly 36x earnings!
• Dell is well-positioned leverage efficiencies
  associated with its direct model to exploit
  higher-growth, higher-margin areas like servers
  and storage.

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Snapshot

• Share price-NYSE (2/26/02) 26.6
• 52 week range 16.63 to 30.49
• Market Capitalization 1, 702,000,000
• Shares Outstanding 2,784 M
• Dividend Yield 0
• Est. 5 Years EPS Growth Rate 11.6

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Background

• Started in 1983 by Michael Dell in a dorm room
• Officially named Dell Computer Corporation in
  1984
• Products
• Notebooks
• Desktops
• Servers and Storage
• Switches and Services

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Business Summary

• One of the world's largest direct computer
  systems companies with annual revenues of 32
  billion.
• Number one in both US and global PC sales.
• Distinguishes itself by its direct channel
  policy.
• Dells integrated supply chain has allowed it to
  gain market share while remaining profitable.

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Definitions

• Server powered PCs that help manage Web sites
  or data on corporate networks.
• Services consulting, system deployment,
  e-business strategies, web hosting, designing
  worldwide storage networks etc. Solutions
  building.
• Storageboxes that hold data for low end and
  medium powered servers
• Switches black boxes that connect computer
  networks

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Business Strategy

• Price Wars
• Decentralized and Coordinated
• Customer knowledge

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Competitors

• Hewlett Packard
• IBM
• Compaq
• EMC
• Gateway

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Strengths

• Direct model
• Supplier Relationships
• Pricing
• Michael Dell
• Get results culture
• Internet marketing

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Opportunities

• Globalization
• Services
• Commoditization of Storage and Switches
• Uncertainty surrounding the HP-Compaq merger
• Servers

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Threats

• Uncertainty
• Reduction of already narrow margins in the PC
  business
• Strong competition in services
• Dellionaires
• Increase in component pricing

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Weaknesses

• Limited RD capability
• Reliance on Microsoft and Intel
• Nobody underestimates Michael Dell anymore
• 70 of revenues come from North America
• Dells PCs are not known as superior consumer
  machines.

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Risks

• Deterioration of the Euro and European demand
• Downward pressure on margins
• Implausible accounting
• Acquisitions to ensure growth

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Reformulation of Statements

• Calculated CSE by adding balance from previous
  year, common dividends and preferred dividends.
• Calculated NOA and NFO from the Balance sheet.
  Cash and cash equivalents in the balance sheets
  are split between a portion for operating needs
  and investment of excess cash in financial assets
• Calculated Core Operating Income, Operating
  Income after tax and Net Financial Expense from
  the Income Statement.
• Calculated free cash flow using the formula
  OI-change in NOA

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Analysis of Profitability and growth
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Forecasts
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Discount Rates

• Cost of equity, Ke 17.46
• Cost of debt (Net Borrowing Cost) NFE after tax
  / (NFOtNFOt-1)/2 13.46
• Required Return kEVE/VF kDVD/VF17.28
• using Dell market close on March 18, 2002 of
  26.39 per share.

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Methods of Valuation

• Using Earnings and book values
• vE CSE2001 ReOI2000/kF 12,6331
• Value per share 4.68
• Using Accounting rates of return
• vE CSE ReOI2001/(kF-g) 50,010.7
• Value per share 19.23
• where ReOI Forecast of OI (NOA2001 NOA2000)
• Using DCF
• vE 56,012.8
• Value per share 18.22

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Summary of Valuation Analysis

• Derived Value 18.22
• DCF valuation lt market stock price
• Sensitivity analysis value per share could be as
  low as 5.

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Recommendation

• A Hold rating on Dell shares is placed as I
  believe that the competition in the PC market
  will continue to be strong. Trades at
  36xearnings.
• Strategic alliance with Unisys
• Alliance with EMC
• I project short-term revenue growth to gradually
  decline