PC Wars-The Saga continues
Richard C. Stoyeck
StocksAtBottom.com
August 30, 2006 At one time Dell Computer was one of the
extraordinary growth stories in America. Michael Dell could do no
wrong. There then comes a time in every entrepreneur’s career
when he or she has to recognize, it’s time to step aside and let
new, historically proven managers come in and run with the ball.
Michael Dell stepped down two years ago, and turned the ball over
to Kevin Rollins who runs the company on a day to day basis. Dell
either has to be kicking himself in the butt for turning the reigns
over to Rollins, or be happy that he himself is not on the firing line
at the moment.
Dell was innovative in selling directly to the consumer as a
business model. It worked brilliantly for years. The firm had no equal
in the direct to consumer market. Dell also was encouraged to sell big
time to the corporate market. All great technology oriented growth
companies hit walls. My work shows that it tends to happen about 7
years or so into the growth process. The exceptional growth company
can take longer before it hits the wall, and has to reinvent itself.
The word reinvent is the correct one to use.
Microsoft has now entered such a period, having become a cash cow
as opposed to being a growth company. In my history of technology
investing which goes back 35 years, I have never found a growth
company that has not hit a wall somewhere in the growth process.
What happens is that companies at some point tend to rest on their
laurels, their past successes and glories. They become so committed to
what they are doing, that they become incapable of seeing the next
revolution sneak up behind their backs and challenge them for
supremacy. It always happens and it’s always the same way with
the same result. Never have I seen a single growth company that could
reinvent the revolution. It’s always some new kid on the block
that spearheads the next new thing.
The consumer has probably now reached a stage where he wants to
walk into a store and see what he’s getting for his money as
opposed to just reading specs on his computer and talking to an
outsourced person in India who is absolutely clueless about American
culture.
In the last five quarters, Dell has missed on the estimates that it
has given Wall Street. In the last quarter there has been a 51%
decline in quarterly profit, and now a recall on 4 million laptop
batteries to boot (no pun intended). This is not the way to run a
major Fortune 100 company.
Things always get worse before they get better
When a growth company hits the wall and starts to decline, the
decline usually has to go for quite a while before a new management
team takes the reins and starts to engineer a midcourse correction.
This is like turning an aircraft carrier around. First you have to
make the decision to go another way. You then have to get everybody
else on board quickly. It takes several miles to get a carrier turned
around at sea; it’s not easy for corporate management to do it
either.
Dell will have to re-examine its direct to customer sales model,
because right now Hewlett Packard is eating them for lunch. The stock
is down 60% from its high for good reason. The stock market is telling
you something. Is anybody listening down there in Texas.
Dell bet big on the corporate market, and completely failed to take
into account the changing sentiments of the consumer market. Dell
needs to grow bigger outside the United States. Everyone agrees that
the US market is not really a growth market at the moment. The firm
must increase international sales to a point where it’s growing
15 to 20% internationally. I don’t see it happening.
Somebody and not Rollins has to address the lackluster customer
service in this country. Why not Rollins? It’s because he was in
charge of the company when the problem became a problem. You never
want the guy who was involved with the problem to be the guy who fixes
the problem. He’s too busy protecting himself than to fix the
problem. That’s management 101.
Dell use to be almost perfectly run. They had the low cost model,
and the competition, namely Hewlett Packard, Acer, Apple, and China’s
Lenovo were always playing catch-up, and stumbling trying to catch up.
Why did they stumble, it’s the same in football, you go for the
long bomb when you are behind in the fourth quarter. Now the
competition finds its model working, and Dell is stumbling.
I realize that Dell has spent money fixing customer support, and
trying to convince people that their product is no longer a commodity.
I have seen zero results from this expenditure at this time. In my own
work as a money manager, I have lowered my estimates for this company
six times in the last twelve months. I currently do not carry it in a
single portfolio. Fortunately, I missed the whole move downward, and I
am not willing to bet on this company yet.
Yes, Dell is now considered a value stock by many. The problem is
that the growth players haven’t been completely washed out of the
stock yet. This will take more time. The institutions that have had a
tough time performing this year will be under pressure to rid their
portfolios of Dell by year end if the stock doesn’t perform. Dell
has agreed to market processors by AMD as well as Intel. They will
probably take a hit to their margins because Intel was probably
rebating them back a portion of the sales to be an exclusive with
Dell.
The company is still sitting with almost $11 billion in cash on the
balance sheet, which works out to about $4.50 per share. Wall Street
is in the process of lowering estimates for 07. Here’s the bottom
line, with Dell you still have a valuation risk. Hewlett Packard is
growing faster and selling cheaper. The only reason to own Dell here
is its previous extraordinary history, but in stocks the past is not
always prologue to the future. A stock has no ideas where it traded
yesterday, and Dell has to execute on a believable strategy. Go
figure.
Goodbye and good luck
Richard Stoyeck
