Friday, May 30, 2008

Dell (NASDAQ:DELL): Downgraded to Sell at Cross Research

- According to the firm while DELL reported F1Q09 EPS upside driven by higher revenue and aided by lower share count ($0.03 benefit), gross margins were down (83 bps y/y), despite a favorable component pricing environment, contributing to a 73 bps y/y decline in operating margin. Dell reported unit share gains (total units up 22%) in all geographies, driven they believe by aggressive pricing and at the expense of margin. Assuming component pricing increases somewhat (as most companies are now expecting) and emerging markets sales continue to increase, the firm believes gross margin will be difficult to maintain/or improve.

Based on where the firm assumes the stock will open this morning (DELL is now trading in the mid teens versus consensus and HP around 10x to 11x), they think significant, positive quarterly earnings surprises will be required to provide much upside to the share price. With exposure to the US, potential for a slowdown overseas, need to fund the enterprise leasing business (potential drag on earnings and significant use of cash) and apparent aggressive pricing required to drive revenue growth, they are lowering their rating to Sell with a price target of $19.

Notablecalls: Note that Lehman is also out on DELL saying they were quite surprised by the magnitude of the after-hours reaction. Co reported EPS of $0.38 vs consensus of $0.33, and they believe that excluding about $0.04 in net benefits, EPS was actually largely in-line. Revs from notebooks, servers, storage, services, and S&P modestly exceeded their ests, while desktops fell short. Currency & acquisitions added almost 6 points of help y/y.

I think DELL may be a short here below $24.

1 comment:

The HardHead Fund said...

Dell stinks - cutting 7000 employees helped the bottom end - but what about next report. Everyone is buying Apple and HP. I agree SHORT DELL!