Does anyone else remember those crazy days of the late 1990s when technology companies were going up several points every day? Then they’d split their stock, and it would just run up all over again? For the most part, these stocks had no business running up the way they did. A few companies, however, had substance behind the sizzle. One of them was based on the great idea that you could buy a made-to-order computer just like getting a burrito at Chipotle. That concept was created by Dell Computer (NASDAQ:DELL).
I held Dell stock back in those days and rubbed my hands greedily together after every market close — until the Nasdaq crashed, I sold the stock and vowed never to get into tech again. I wondered where Dell had gone in the interim, since computers now are a commodity, and there was no way the company still could be based solely on that concept.
It isn’t. Not even close. Sure, Dell still does the computer thing, but it also provides servers, networking and storage solutions. The company also has moved into software, such as operating systems, business and office applications, and security products. Dell also is into IT and business services, like systems and network management, infrastructure, applications, business process and business consulting services. And Dell has an in-house financing option if you can’t afford any of these items.
Then again, much of this stuff also is quasi-commoditized. Everybody offers something like it — I’m talking about Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM), just to name a couple. That means big-time competition from big-time players. Somehow, Dell went from that super-high-growth company to a tired veteran duking it out with the other warhorses. If you’re an investor, you probably can guess that means things like tight margins — and you’d be right.
Dell’s net margins are 5.3%, HP’s are 7.6% and IBM blows them both away at 14.7%. IBM keeps humming along with quarterly revenue growth around 12%, while Dell’s is basically flat. And while Dell’s earnings are expected to rebound sharply this year — from $1.59 per share to $2 — they are expected to be flat the year after, with annualized growth of only 6% looking out five years. Considering that this year is responsible for 30% growth, it suggests Dell’s growth will be flat thereafter. Yuck.
That’s not to say Dell doesn’t make a lot of money. It does. That two bucks per share means net income of $3.64 billion. The company’s free cash flow has been around $3.5 billion in each of the past two years and was $1.45 billion in 2008. Dell already has $2.5 billion of free cash flow in the first two quarters of this year alone. The company has almost $5 per share in net cash. These are good numbers.
Conclusion
If you back out the $5 in net cash, Dell is trading at the equivalent of $10. That’s a P/E of just 5 on this year’s earnings. However, this is a no-growth play at the moment, and despite all the cash it generates, I just don’t see why it has a place in any portfolio. If Dell tossed in a 4% to 5% dividend, then we’d have something to discuss.
As of this writing, Lawrence Meyers does not own a position in any of the aforementioned stocks.
