Tuesday, February 20, 2007

Calls of Note Part 1

- Bear Stearns is positive on Dell (NASDAQ:DELL) saying that though it will take time to show sustained improvement, they see compelling risk/reward in DELL shares. Turnarounds are hard to see because the problems seem unfixable. But history shows that turnarounds are possible.

Formula for a turnaround is straightforward: stop doing the bad things that lose money, focus on improving the things that made you successful to begin with. And usually new management: a company has to break the denial mindset and shift to a sense of urgency to create a "can do" winning sense of morale.

To them, the opportunity at Dell is leverage on the gross margin, where every 100 bps is around $0.20-0.25 per share in EPS -- can enhance with better products/service, reduced drags on gross margin.

Though Dell's turnaround remains at an early stage, it's taking positive steps forward (i.e., de-emphasizing low-margin biz, improving services/support, replacing key mgmt).

While some view Dell mgmt dislocation as positive for HPQ, to the firm the issue has always been Dell vs. Dell (i.e., self-inflicted, execution and not competition). Recalls problems started in early 2005 when industry growth high, HPQ had no CEO, IBM selling PC biz to Lenovo. While visibility remains low, they are reducing ther estimates for 4Q07 (reported on 3/1) from $0.32 to $0.18 and for FY08 from $1.45 to $1.00, but maintaining FY09 at $1.75 -- not because they have great visibility but to highlight the operating leverage.

While ests will be in flux for the next several qtrs, they see mgmt changes as one key step toward successful turnaround. If firm's thesis is right, the stock has potential upside to their $35 target (20x CY08 EPS), and turnarounds often perform better than one expects/forecasts.

Maintains Outperform.

Notablecalls: Think this note may create some buy interest in DELL in the very s-t.

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