Financial Analysis and Forecasting

1
Financial Analysis and Forecasting

• Professor Carlos Vecino
• E14 - Team 91
• Case Dell

2
Dell suffered a dramatic fall in its stock price
during the year 2000. The fall in stock price
was generated by internal poor performance or was
it a general industry crisis?Presenter Anya
Grant XU OLIVEIRA ZHENG OCONNELL
3
Agenda
IT Industry
PC Industry
Observations
Notes
Dell and Industry Analysis
Home

• Overview of the IT Industry in 2000
• Overview of the PC Industry in 2000
• Dell and Industry Ratios
• Observations and evaluations of Dells
  Performance and Stock Price
• Notes
• Questions

4
Overview of the IT industry 2000
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• US faced its most controversial election in 2000
  bringing political instability to the an already
  weakening economy. This exacerbated IT industry
  problems.

5
Overview of the IT industry 2000
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Wall Street Is the party over? is stated in
  the Business Week Cover in April, 17th, 2000.
• Time Europe A Market Fit to Burst
• The IT Industry was facing a general scenario of
  caution by investors and the IT companies stock
  values began to fall dramatically.

6
Overview of the IT industry 2000
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• The Nasdaq Index experienced tremendous growth in
  September, 1999, but started to fall, coming
  back to earth (Business Week April 2000).

7
Overview of the IT industry 2000
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• The TOP 10 fall records in the Nasdaq history
  happened in the year 2000.

8
Overview of PC Industry and the Economy
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• US quarterly GDP saw slow growth in Q4 of 2000
  and negative growth in Q1 2001. Most economists
  predicting first recession since early 90s.
• Reduced tech spending among major US firms will
  have a negative impact on sales. Especially
  hard-hit in these purchasing trims PCs that
  don't provide much profit bang for the buck.
  (Business Week, Dec. 18, 2000)
• The falloff in corporate IT spending has spread
  worldwide, too, coming home to roost among
  American suppliers. In Europe, slow adoption of
  Microsoft Corp.'s new Windows 2000 software has
  pulled down corporate PC sales by over 20 this
  year. That slammed the earnings of Dell
  Computer Corp., which had counted on the European
  market for a sales boost.

9
Dell and PC Industry Analysis
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dells Performance Highlights
• Common Size comparisons
• Base Year Comparisons

• Liquidity Ratios
• Efficiency Ratios
• Financial Leverage
• Profitability Ratios
• ROE Decomposition

10
Dells Performance Highlights
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dell revenues increased 26 in 2000 over 1999.
• EBITDA increased 20
• The EBITDA as a proportion of revenues decreased
  by 7 in 2000 in comparison with the same
  proportion in 1999.
• The net income increased 31 in 2000
• Analyzing the Common Size combined with the
  Common Base Year, net profit as percentage of
  sales increased 4.
• Total current assets increased by 24 in 2000
  over 1999 and total current liabilities increased
  26 in the same period.

11
Common Size Comparison Highlights
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Industry average of inventory as a percentage of
  total assets is 9,6. Dell carries inventory
  valued at 2,9 of its total assets.
• The industry average for COGS as a percentage of
  revenues is 72.Dell has COGS as 80 of its
  revenues.
• The industry selling expenses average represents
  14 of the revenues. For Dell, this represents
  only 10 of revenues.

12
Common Size Comparisons
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• The current assets of Dell represents 70.64 of
  its total assets.
• The industry current assets over total assets
  average is 58.35.
• In 2000, Cash and Securities represent 40.5 of
  total assets vs. competitors average of 10.3.
• We can assume that Dell has less proportion of
  assets as fixed costs than the average of its
  competitors.

13
Common Base Year Comparisons
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• In 2000, Dells cash increased 32 over 1999,
  industry average dropped 35
• Dells inventory increased 2 industry average
  increased by 22
• Dells net income increased 31 industry average
  dropped 8
• Dells EPS increased 27 the industry average
  dropped 8
• Dells net cash provided by operating activities
  increased 7 industry average dropped 31.

14
Dell and Industry Liquidity
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• In 2000, Dells current ratio was 7 better than
  the average of its competitors.
• HP had a result 6 better than Dell in 2000.
• Dell had a current ratio 20 better than IBMin
  2000.

15
Dell and Industry Liquidity
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• In 2000, Dell improved its results by 11 in Cash
  plus securities over its total assets from 1999.
• All major competitors saw their ratios decline in
  2000.
• This ratio is 290 better than the average.

16
Dell and Industry Efficiency
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• At the end of 2000, Dell held 5.74 days of
  inventory vs 7.12 in 1999.
• The average industry result for this ratio was
  32.58 days.
• Dell achieved a result 82,4 better than the
  industry average, which means approximately 26
  days of better efficiency managing the inventory.

17
Dell and Industry Efficiency
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dell achieved in 2000 a financing period of -23
  days.
• This result is 82 days better than the average of
  industry of 59 days

IND. AVG
DELL
IBM
GATEWAY
HP
COMPAQ
18
Dell and Industry Financial Leverage
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dells Debt over EBITDA is 56 lower than the
  average for the industry.

19
Dell and Industry Financial Leverage
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dell is able to pay 58 times its interests.
• The average industry is able to pay 13.6 times
  its interests.

20
Dells Profitability
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• In 2000, Dell achieved a return on assets of
  16,2.
• This performance was130 better than the
  industry average and up 6.7 from 1999.

21
Dells Profitability
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• In 2000, Dell achieved a return on common equity
  of 39, up 26 from 1999.
• This performance was96.5 better than the
  industry average in 2000.
• IBM achieved a return on equity of 38.

22
Dell ROE Decomposition
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• The Du Pont Identity
• ROE Net income/Sales Sales/Total asset
  (1Debt/Equity ratio)
• Profit margin Total asset
  turnover Equity multiplier
• Operating efficiency Asset use
  efficiency Financial Leverage

ROE Profit Margin Total asset turnover Equity multiplier
Dell 1999 31.39 6.59 2.20 2.16
Ind. Avg. 1999 20.40 5.82 1.47 2.50
Dell 2000 38.72 6.83 2.37 2.39
Ind. Avg. 2000 20.00 5.14 1.61 2.62
23
Market to Book Ratio
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Dell achieved in 2000 a market to book ratio of
  8.04.
• The average for the industry in 2000 was 4.05.

24
Stock Price Comparison (Jan 1,1996 to Jan 1, 2001)
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• DELL had its stocks price declining from US 51
  in 1999 to US16 in 2000. Drop 70.
• Gateway stocks price dropped 75 in the same
  period, from US72 to US18.
• IBM stocks price declinedonly 21 and HP 29

IBM
HP
Gateway
DELL
Compaq
25
Summary
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• State of Competitive Advantages
• COST LEADERSHIP Direct Marketing
• Liquidity
• Cash on hand increased 32 and Cash/Assets is
  290 above industry
• Low fixed assets Less than 30 of total assets
  (vs 42 industry average)
• Efficiency
• Low Inventories Turnover of 5.7 days vs industry
  average of 32.6 days
• Cash-to-Cash 82 days faster than industry
  average
• Financial Leverage
• No short-term debt, and long-term debt Interest
  charge coverage 425 above industry average
• Profitability
• ROA 130 above industry average
• Return on common equity 39 --------- 96.5
  higher than industry average and equivalent to
  IBM
• Results support benefits of current Direct Model
  strategy

26
Observations and Evaluation Stock Price
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• RISE
• 5600 increase in share value over 4 years based
  on a combination of very favourable market
  conditions and forecasts in mid to late 90s and
  the successful implementation of the Direct Model
  Marketing strategy which gives Dell a clear,
  sustainable competitive advantage over
  competition in PC Industry
• FALL
• Penetration rates into homes reached 50 in 2000
  and e-commerce transactions were much lower than
  90s forecasts
• Sales growth in developed countries (America,
  Europe) down substantially
• Industry-wide shock punctuated by DOT.COM bubble
  burst
• Market Reaction
• Market re-evaluation of tech stocks, including
  DELL, on the heels of a major burst and on the
  toes of a pending recession
• Given going market conditions, investors may have
  perceived DELLs focus on PCs as riskier in
  comparison to more diversified companies such as
  IBM and HP and stock value was adjusted
  accordingly
• Observations
• All ratios are consistent with business strategy
  and competitive advantage and are proof that
  DELLs strategy works.
• IF IT AINT BROKE, DONT FIX IT!!!!!

27
Observations and Evaluation Stock Price
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• Only one suggestion to the board to reduce slide
  of stock price
• Dell have a final cash position of 5.4 billion.
• Different uses of cash to increase returns
• By distributing more dividends, instead of having
  this final cash, Dell could perhaps have reduced
  the drop in its stock price.

28
Notes
IT Industry
PC Industry
Notes
Dell and Industry Analysis
Home
Observations

• This presentation and the corresponding excel
  graphs and analysis are available for students
  at
• http//ca.briefcase.yahoo.com/
• Yahoo ID hecdell
• Password team91

29
Questions ?
MBA 2003-2004 TEAM 91
30
Financial Analysis and Forecasting

• Professor Carlos Vecino
• E14 - Team 91
• Case Dell Second Part

31
Dells strengths and possible weaknesses
Strengths Weaknesses
Solvency Ratios
Dell Du Pont Analysis
Home
Conclusion
Main Uses of Cash

• Strengths low cost, high efficiency
• Lower inventory from 3.4 of assets to 2 in
  2002
• Increase receivable turnover growth of 41 from
  2002 over 1999
• Decrease payable turnover
• Possible weaknesses
• Decrease liquidity by reducing its current
  assets.

32
Short Term Solvency Ratios
Strengths Weaknesses
Solvency Ratios
Dell Du Pont Analysis
Home
Conclusion
Main Uses of Cash

• Reduced Cash position
• Improved Inventory Turnover
• Reducing Current Assets

Current Ratio -32 Quick Ratio -31 Cash
Ratio -35
33
Main Uses of Cash -1999 to 2002
Strengths Weaknesses
Solvency Ratios
Dell Du Pont Analysis
Home
Conclusion
Main Uses of Cash

• Dell increased investments 94. In 1999 it was
  23.7 of total assets and in 2002 investments
  represented 34 of total assets.
• Dell bought back treasury stocks, reducing total
  equity from 46.3 of total liabilities equities
  in 1999 to 31.5 in 2002.

34
Du Pont Analysis of Dell
Strengths Weaknesses
Solvency Ratios
Dell Du Pont Analysis
Home
Conclusion
Main Uses of Cash

• Equity Multiplier increased as a result of
• Assets increased 35 from 2002 to 1999
• Total equity decreased 8in the same period

• Return on Equity increased as a result of
• Dells Net Income increased 27
• Total equity decreased 8in the same period

35
Comparison Dell and Competitors (Du Pont
Analysis, 2002)
Strengths Weaknesses
Solvency Ratios
Dell Du Pont Analysis
Home
Conclusion
Main Uses of Cash

• The strong competitive advantage of Dell is still
  evident

• The highest Profitability
• The highest Efficiency
• The highest ROA and ROE

36
Questions ?
MBA 2003-2004 TEAM 91