Dell-Case Study in corporate self-destruction,
or It’s
tough to hit the ball, when your eye isn’t on it
Richard C. Stoyeck
StocksAtBottom.com
August 18, 2006 All companies go through various cycles of growth
at various speeds. This is also true in the way in which the stock
market embraces them, and then spits them out, and throws them away.
The market darling at the moment going through such a cycle is Dell
Computer. This computer is now in the process of switching places with
also-ran Hewlett-Packard which was out of favor for years.
Since Dell’s inception in the 1984 and later its public
offering, the company could do no wrong. Its sales are now approaching
$60 billion dollars and its number 25 on the Fortune 500. They have
utilized a direct model approach to building PC’s since the
beginning. This eliminated the middleman, and allowed you the customer
to build your computer to order. In other words, you got a custom made
machine. This is also the only company I have encountered with a
negative cash conversion cycle. They get your money before they owe it
to the vendors who sell them the parts. It’s literally unheard of
in business.
How things can change in the blink of an eye
This company once had the finest customer service in the business.
The whole deal was moved to India with disastrous effects. I have
encountered no one, that’s right no one who has a decent word to
say about Dell’s customer service. I have had several encounters
myself with Dell’s version of customer service. Let me illustrate
one. I had to spend a ridiculous period of time explaining my address.
It’s simple I live in Westport, CT., but if you have ever tried
to send a package to Europe, the addresses work differently. I can’t
imagine, how they do addresses in Bangalore, India where these call
centers are.
If a person has no feel for your culture and the way you conduct
your life by being immersed in that culture, it’s comes right
through on the telephone, and that’s Dell’s problem in
India. A company replaces thousands of Americans with foreigners, and
then thinks it’s going to be okay. What Dell doesn’t realize
is that people vote with their feet, and they are now voting for
Hewlett Packard, and other Dell competitors.
Exploding computers-Fires on Planes
Dell’s recall of several million computers because of
exploding batteries illustrates how management has lost touch with
reality. Years ago, Johnson and Johnson had a public relations
nightmare over the tampering of several shipments of Tylenol. How JNJ
handled the PR from this scandal is a showcase example that is studied
daily in colleges across the country. Dell did not confront their
exploding batteries problem directly. They dodged, they hemmed, and
they yawed. This resulted in a tremendous loss of consumer confidence
in the company that will take years to rebuild, if in fact they can
rebuild it.
Who’s driving the bus?
Dell has now announced a 41% drop in their fiscal second-quarter
profit, and now there are accounting issues facing the company. In
their announcement Dell attributed the earnings decline to overly
aggressive pricing. This is utter nonsense. The company should be more
forthcoming about their problems. The aggressive pricing that they are
alluding to is not reflected in the numbers I see. I have looked at
both their desktop and notebook average selling prices for the last
two quarters. They were flat on a sequential basis, so what are they
talking about? Server ASP’s were even up on a sequential basis.
The folks at Dell have to come up with a better story. On a year to
year basis there are price declines in the desktop, notebook, and
server ASP segments, but that’s not what Dell is saying.
If you are going to con people, you should concentrate on conning
the ignorant. The recall of 4 million batteries isn’t going to
help from a public relations standpoint. Parents right now are buying
personal computers, and notebooks for their kids to go back to school.
This includes college sales. The battery problem could not have come
at a worst time in terms of endearing the young consumer to Dell.
It probably made sense for Dell to announce that they were going to
start buying processors from Intel competitor, Advanced Micro Devices
for their low end Dimension series of desktops. You put it all
together and it’s going to take several quarters at the very
least for management to turn this aircraft carrier size company
around, and get it back on track. In the interim, this stock remains
expensive.
You can not expect biased Wall Street to tell you the truth about
Dell. The investment banking commissions on this company are huge.
What’s it worth. This is simple. The peers are outperforming Dell
and the peers are selling at 15 times earnings. Dell only deserves a
premium to the peers because of its past illustrious history. If you
give Dell a 17 PE multiple, and you believe the $1.12 number for
fiscal 08, we have a stock trading under $20 and maybe lower, awaiting
good news. If you give Dell a peer type price earnings ratio, it’s
15 times a $1.12 and that gives you a $17 stock, either way, it’s
not pretty. Keep in mind that institutions don’t like to explain
stupid investments to the people that give them the money to manage.
If Dell is still in the doldrums at year-end, the institutions will
bail big, rather than explain it. Dell will become the ultimate
year-end tax loss selling candidate, and we don’t see the
turnaround in sight yet.
Goodbye and good luck
Richard Stoyeck
