Dell Earnings Preview: Second Quarter 2009

Dell [[DELL]] is scheduled to report their second quarter results after the market closes on Thursday, August 27. Based on our analysis, we at are expecting DELL to report better than expected results that exceed Wall Street’s consensus expectations.


Analyst Expectations

We are forecasting revenues of $12.86 billion and EPS of $.25. This would represent a 22% decline in revenues from last year’s $16.43 billion in the same period. The current analyst consensus estimates calls for revenues of $12.57 billion and EPS of $.23.


While sales of Dell computers have been significantly impacted by the economic recession, we believe that IT spending is beginning to show signs of improvement. Hewlett Packard [[HPQ]] reported better that expected earnings results yesterday and CEO Mark Hurd commented that “business is stabilizing”. Personal computer sales fell 18% for HP as they continued to take market share. However, Wall Street is expecting Dell sales to fall 24% y/y which would be even worse than last quarter’s 23% decline. Given these low expectations, we see a strong opportunity for Dell to deliver an upside surprise.


Although economic indicators remain mixed, it appears as though our economy is coming out of the recession. While no one expects a huge boost in consumer spending, IT spending is likely to be one of the early beneficiaries of an improving economy.  


Stock Performance

Since the beginning of 2009, Dell’s shares have gained nearly 41% and have significantly outperformed the 5% gain in the Dow Jones industrial average. Of course last year, Dell’s stock fell 58% and badly underperformed the 34% drop in the Dow Jones industrial average.



Shares are now trading at 12x consensus 2010 EPS estimates. This is a discount to the relative valuations of their peer group, but a slight premium to the multiples of Hewlett Packard and IBM [[IBM]]. With improving economic conditions, we would expect that Dell’s shares will continue to rise.  


Recommendation: Buy with an $18 price target.


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