Fundamental Fridays: DELL
TST’s first Fundamental Friday will analyze Dell Computer.
I am particularly fond of Dell, as its stock financed a portion of my college education. :) Many years ago, my mother stumbled upon Dell Computer when it was trading around $3. Between 1992 and 1999, Dell shot up and issued seven stock splits. Dell’s post internet bubble performance has been pretty rough. In 2008, the stock is down about 50 percent and is now trading just above $12 per share. Let’s take a look at the fundamentals.
Valuation measures:
Price-earnings - Compares the current market value per share to the earnings per share. P/E ratio for DELL: 9.06, P/E industry average: 7.88. Signal: OVERVALUED
Price-sales - Compares the current market value per share to the revenue per share. P/S ratio for DELL: 0.37, P/S industry average: 1.03. Signal: UNDERVALUED
Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.
Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate)
For DELL, the 5 year P/E average is 25 (from Reuters), EPS from last year $1.34 (yahoo) and 5 year average EPS growth rate is 10.32% (Reuters), resulting in an expected stock price of $36.96. Signal: UNDERVALUED
Profitability Measures:
Return on Assets - Net income relative to total assets. ROA for DELL: 10.08%, ROA industry average: 4.07%
Return on Equity - Net income relative to total equity. ROE for DELL: 63.58%, ROE industry average: 8.27%
Profit margin: Net income relative to revenue. PM for DELL: 4.44%, PM industry average: 3.32%
Bottom Line: Mixed bag on valuation, positive on profitability. According to Reuters the consensus on Dell is “outperform.”
Remember, there are a ton of ratios out there and ratios alone aren’t of much use. You should examine these ratios relative to Dell’s competitors, sector and industry averages to see how Dell stacks up. The data used is also pulled from financial statements, which have been known to be subject to manipulation.
Based on the ratios used today, TST’s Fundamental Friday Recommendation: BUY
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1 opinion for Fundamental Fridays: DELL
Should You Go Digging Through Financial Statements? Fundamental Fridays Follow-Up
Dec 26, 2008 at 1:24 pm
[...] return on equity (ROE), and return on assets (ROA) to examine the valuation of four companies: Dell, Alcoa, Amazon.com and [...]
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