Notable Calls

Several tier-1 firms are defending Dell (NASDAQ:DELL) this morning following FQ2 results:

- Merrill Lynch notes Dell remained on course to reignite growth and in F2Q08 it gained share across its primary product segments and grew revenues 11% YoY, above their 6% estimate. However, aggressive pricing and increased deferred services revenue in EMEA resulted in gross margins over a pt. below MLCO estimate and a $0.03 miss on EPS. Firm reiterates their Buy rating and $27 price objective based on Dell’s traction in share gains as it benefits from the investment phase of its turnaround and in the long term operating leverage improvement.

- Morgan Stanley says they are buyers of DELL shares on a pullback post the July quarter EPS miss because: 1) while clearly an execution problem, EMEA margins are isolated and fixable with some improvement likely in F3Q. 2) Our enterprise mix thesis is on track as evidenced by market share gains that drove a 70 bps improvement in Americas + APJ commercial operating margins (to 8.4%). 3) New product momentum should accelerate in F2H09 and these lower-cost products shift the restructuring focus to COGS. DELL’s EPS fell $0.04 short of their forecast and $0.03 short of consensus, but would have beat estimates by $0.02-0.03 if not for the EMEA shortfall. Firm lowers the EPS bar for the next two quarters but don't believe this quarter’s mis-execution is structural; therefore FY2010 and FY2011 estimates remain unchanged. Maintains OW.

- Citigroup believes both short and long-term investors should buy DELL shares on yesterday's weakness. 2FQ's gross margin shortfall was self inflicted and should largely reverse in 3FQ. Moreover, the company is making solid progress with op ex and should start to see significant progress with product COGS during the coming 6-12 months. While $2.00 in earnings has probably been pushed back by six months, their valuation work still suggests a twelve-month target of $28, 23% above the after-market price of $22.69.

Self Inflicted Wounds in Europe - Europe was almost entirely responsible for an unanticipated 90bp qoq decline in gross margin. Sixty percent of the shortfall was caused by a shift in services revenue recognition from upfront to deferred while 40% was mgmt's decision to aggressively pursue commercial notebook share in EMEA. We sense that Dell is considering a return to previous services sales practices which allow immediate revenue recognition. On pricing, they believe Dell has already rectified its mistakes.

- UBS, I'm hearing is the most negative of the bunch saying they do not expect an improvement in the n-t.

Notablecalls: I think DELL will be higher from here (@ $22.70 pre mkt) in couple of weeks. Not exactly sure how to trade the stock in the very s-t, though. We may touch $22 (or even lower) levels is what I'm worried about.

I will be an oportunistic buyer here leaving a lot of dry powder to take advantage of lower levels.