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Dell Inc. - still a growth company?

Dell Inc. - still a growth company?. 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. History.

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Dell Inc. - still a growth company?

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  1. Dell Inc.- still a growth company? Stefan EisnerDecember 1, 2005

  2. Outline • Company Facts • Portfolio Position • Business Strategy – key tenets • Segmentation by product & geographical • Industry – current developments • Stock Facts • Valuation • Recommendation

  3. History • 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 • 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Geographical Segmentation

  13. Geographical Segmentation

  14. Dell‘s Market Share PC‘s*

  15. 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

  16. Industry – US Home Computer market forecast

  17. Share Buyback • YTD haverepurchased 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

  18. SWOT – a overview S W • Single source suppliers • Low R&D spending • Poor customer service • Problems in China • Leading market position • Notable clientele (large companies, state goverments) • Superior business model • Strong operating performance • Cash Cow • No traditional pension plans • Partnership with Microsoft(creating single tool managing hardware and software) • INDUSTRY • Growth in the digital color printer maket • Sale of IBM‘s PC Business to Lenovo (Europe/US) • Trend to more modular, standard products and clusters of less expensive machines (server&storage) • COMPANY • Printer Replacement business • Expansion of product portfolio (consumer electronics) • International Expansion • Entering new markets through partnership O • INDUSTRY • Decreasing PC prices • Desktops revenues will decrease heaviley until 2010 • Porter‘s five forces: - High Industry Rivalry - High Bargaining Power of Buyer • New CEO at HP -> cost reducing • Sale of IBM‘s PC Business to Lenovo (Asia) • Asian „No-Name“ producer • Increasing component prices T

  19. Competitors

  20. 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

  21. Stock Performance last 5 years

  22. Stock Performance last 2 years vs Competitors Vs: Hewlett Packard, IBM, Gateway

  23. Valuation - Beta

  24. Valuation – 3 Scenarios • Verification of Forecast and Assumptions of Segments by: • Calculating ratios • Computing Implied Growth rates of Geographical segments • Reviewing sales development

  25. Valuation – sensitivity analysis (normal)

  26. RECOMMENDATION - Considerations Source: Yahoo!Finance 11/30/05

  27. 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

  28. Question & Comments

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