Dell Inc.
- still a growth company?
Stefan Eisner
December 1, 2005
1
Stefan Eisner
December 1, 2005
Outline
 Company Facts
 Portfolio Position
 Business Strategy – key tenets
 Segmentation by product & geographical
 Industry – current developments
 Stock Facts
 Valuation
 Recommendation
2
Stefan Eisner
December 1, 2005
History
1984
Michael Dell founds Dell Computer Corporation
simple concept: selling computer systems directly to customers
1987
International expansion -> opening of subsidary in UK
1988
IPO (3.5m shares at $8,50 each)
1989
Company introduces first notebook computer
1990
Opened manufacturing center in Limerick, Irland
-> 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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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
Business Strategy – key tenets (I)
 Direct relationship is the most efficent way to the customer
 Dell‘s „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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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
Manufacturing, Materials Supply & R&D
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
R&D
 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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Stefan Eisner
December 1, 2005
Segmentation by product & services categories
Beginning Q1-FY06 supplemental revenue reporting by product & services
Q3-FY 06 (total revenue: $13.9 billion)
So f t w ar e &
Per i p her al s, 15%
E nha nc e d
S e rv ic e s 9 %
percentage change to Q3-FY05
3%
2%
2%
Enhanced
Ser vices
So f t war e &
Per ip her als
2%
S t o ra ge 3 %
1%
1%
D eskto p P C s
37%
S e rv e rs 10 %
0%
0%
0%
D eskt o p PC s
M o b ilit y
Ser ver s
St o r ag e
-1%
-2%
-3%
M o bilit y, 2 6 %
-4%
-5%
- 5%
-6%
 Desktop PC‘s still most important, but decreasing
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Stefan Eisner
December 1, 2005
Segmentation by product & services categories
Beginning Q1-FY06 supplemental revenue reporting by product & services
Q3-FY 06 (total revenue: $13.9 billion)
 Desktop PC‘s still most important, but decreasing
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Stefan Eisner
December 1, 2005
Geographical Segmentation
Segment - Revenues (million $)
30,000
25,000
20,000
27,652
FY03
FY04
last 4Q
21,888
19,394
15,000
12,312
10,000
5,653
6,715
7,896
8,495
6,912
3,445
5,000
4,346
6,322
US Business
US Consumer
Europe
Asia Pacific - Japan
Operating margin last 6 Quarters
Revenue Grow th Rates
12.0%
11.0%
30.0%
last 2.75years
last year
25.0%
10.0%
23.4%
19.3%
20.0%
15.0%
24.7%
19.8%
9.0%
8.0%
13.8%
12.9%
7.0%
10.2%
10.0%
6.0%
5.0%
US Consumer
Europe
Asia Pacific - Japan
total
5.0%
-1.9%
4.0%
0.0%
-5.0%
US Business
US Business
US Consumer
Europe
Asia Pacific - Japan
Q2-FY05 Q3-FY05 Q4-FY05 Q1-FY06
Q2Q3-FY06
**
FY06***
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Stefan Eisner
December 1, 2005
Geographical Segmentation
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Stefan Eisner
December 1, 2005
Dell‘s Market Share PC‘s*
Based upon IDC Worldwide Quarterly PC Tracker
Q2 CY05
Rank
Trailing 5 Quarter Share
Q2-CY05 Q1-CY05 Q4-CY04 Q3-CY04 Q2-CY04
Worldwide share:
United States
EMEA
Asia Pacific
Japan
1
1
2
3
3
18.9%
34.4%
13.4%
8.8%
13.7%
18.5%
33.9%
13.3%
7.5%
11.6%
16.8%
32.9%
10.1%
7.2%
11.8%
17.9%
32.9%
11.6%
7.0%
10.9%
18.1%
33.3%
12.5%
6.9%
12.0%
US Segment share:
Education
Government
Home
Large Business 1
SMB 2
1
1
1
1
1
1
34.4%
43.9%
34.3%
28.8%
46.7%
31.0%
33.9%
41.9%
33.9%
30.8%
44.5%
31.2%
32.9%
39.9%
34.5%
30.5%
44.7%
28.7%
32.9%
46.0%
34.8%
29.0%
43.8%
26.6%
33.3%
45.5%
32.3%
28.2%
44.6%
28.5%
* PC's includes desktops, portables, and x86 servers, data as of August 2005
Large Business includes sites with more than 500 employees
2
Small and Medium Business includes sites with less than 500 employees
1
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Stefan Eisner
December 1, 2005
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 IBM‘s 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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Stefan Eisner
December 1, 2005
Industry – US Home Computer market forecast
Desktop
Year
Sales at current prices
$million
Index % change
2005 (est.)
5,883
100
2006
4,954
84
-15.8
2007
4,029
68
-18.7
2008
3,108
53
-22.9
2009
2,191
37
-29.5
2010
1,265
22
-42.3
Laptop
Year
Sales at current prices
$million
2005 (est.)
7,488
2006
8,031
2007
8,613
2008
9,236
2009
9,904
2010
10,620
Desktop - Sales at current prices (m illion $)
Index
100
107
115
123
132
142
% change
7.3
7.2
7.2
7.2
7.2
Laptop - Sales at current prices (m illion $)
7,000
12,000
10,620
5,883
9,904
6,000
9,236
10,000
4,954
5,000
8,000
4,029
7,488
8,031
8,613
4,000
6,000
3,108
3,000
2,191
4,000
2,000
1,265
2,000
1,000
0
0
2005 (est.)
2006
2007
2008
2009
2010
2005 (est.)
2006
2007
2008
2009
2010
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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
SWOT – a overview
• Leading market position
S
W
• Notable clientele (large companies, state goverments)
• Single source suppliers
• Superior business model
• Low R&D spending
• Strong operating performance
• Poor customer service
• Cash Cow
• Problems in China
• No traditional pension plans
• Partnership with Microsoft
(creating single tool managing hardware and software)
INDUSTRY
• Growth in the digital color printer maket
O
INDUSTRY
• Decreasing PC prices
T
• Sale of IBM‘s PC Business to Lenovo (Europe/US)
• Desktops revenues will decrease heaviley until 2010
• Trend to more modular, standard products and clusters • Porter‘s five forces: - High Industry Rivalry
of less expensive machines (server&storage)
- High Bargaining Power of Buyer
COMPANY
• New CEO at HP -> cost reducing
• Printer Replacement business
• Sale of IBM‘s PC Business to Lenovo (Asia)
• Expansion of product portfolio (consumer electronics)
• Asian „No-Name“ producer
• International Expansion
• Entering new markets through partnership
• Increasing component prices
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Stefan Eisner
December 1, 2005
Competitors
DELL
Market Cap:
Employ-ees:
Qtrly Rev
Growth (yoy):
Revenue (ttm):
Gross Margin
(ttm):
EBITDA (ttm):
Oper Margins
(ttm):
Net Income
(ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr
expected):
P/S (ttm):
HPQ
IBM
SUNW
Industry
72.29B
55,200
85.00B
N/A
140.42B
348,052
12.87B
31,000
1.13B
1.90K
11.30%
54.18B
7.10%
86.70B
-7.80%
94.38B
3.70%
11.17B
7.30%
3.76B
17.97%
4.77B
23.36%
7.30B
39.17%
18.48B
42.25%
588.00M
17.97%
90.66M
8.11%
5.72%
14.14%
-1.50%
1.98%
3.23B
1.293
23.32
2.40B
0.824
36.01
8.57B
5.16
17.23
-97.00M
-0.029
N/A
-415.22K
N/A
23.53
1.12
1.35
1.32
0.99
1.57
1.49
N/A
1.19
1.99
1.13
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Stefan Eisner
December 1, 2005
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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Stefan Eisner
December 1, 2005
Stock Performance last 5 years
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Stefan Eisner
December 1, 2005
Stock Performance last 2 years vs Competitors
Vs: Hewlett Packard, IBM, Gateway
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Stefan Eisner
December 1, 2005
Valuation - Beta
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Stefan Eisner
December 1, 2005
Valuation – 3 Scenarios
Desktop
Mobility
Other
cost of revenue
S,G & Adm
DCF-Price
+10%
-10%
P/E based on EPS06
bad
decrease
"pricewar"
slow down
increase
slightly increase
23.39
25.73
21.06
14.41
Scenario
normal
flat
normal growth rates
normal level
constant
average 05 and 06
31.40
34.55
28.26
19.35
good
slow growth
still higher growth rates
high level
decrease
decreasing
35.98
39.57
32.38
22.16
Verification of Forecast and Assumptions of Segments by:
• Calculating ratios
• Computing Implied Growth rates of Geographical segments
• Reviewing sales development
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Stefan Eisner
December 1, 2005
Valuation – sensitivity analysis (normal)
beta
0.69
0.74
0.79
0.84
0.89
0.94
0.99
1.04
1.00
4.70%
36.78
34.88
33.18
31.63
30.23
28.95
27.77
26.69
27.55
4.80%
37.37
35.41
33.65
32.06
30.61
29.29
28.08
26.97
27.85
4.90%
37.98
35.95
34.13
32.49
31.00
29.65
28.41
27.27
28.17
5.00%
38.62
36.51
34.63
32.94
31.40
30.01
28.74
27.57
28.49
5.10%
39.28
37.10
35.15
33.40
31.82
30.39
29.08
27.88
28.83
5.20%
39.97
37.71
35.69
33.89
32.25
30.78
29.43
28.20
29.17
5.30%
40.69
38.34
36.25
34.38
32.70
31.18
29.79
28.53
29.53
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Stefan Eisner
December 1, 2005
RECOMMENDATION - Considerations
HOLD
SELL
 largest geographical segment (American Business
Units) growing and operating margin increases
Other geographical segments only flat or negative
Operating income growth
 Growth opportunities outside the US
 Problems in China, UK…
 Still superior business strategy
 Increasing rivalry by Asian companies
 Expansion to higher margin products (printer
replacement, storage&servers, business
customer…)
 pricewar desktops and mobility products, which are
almost two thirds of the revenue
 Share buyback
 no further investment opportunities
 Almost no debt
No long term-guidance of the company
 After the decrease in the stock price, lower growth
rates are partially contained in the price
 historic high double digit growth rates are
improbable
Source: Yahoo!Finance 11/30/05
26
Stefan Eisner
December 1, 2005
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
27
Stefan Eisner
December 1, 2005
Question & Comments
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