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Dell Shares May Rise After Profit Exceeds Analysts' Estimates

By Connie Guglielmo

Nov. 22 (Bloomberg) -- Shares of Dell Inc., the world's second-largest personal computer maker, may rise after the company reported third-quarter profit that exceeded analysts' estimates.

Dell rose $2.21, or 8.9 percent, to $27.03 in extended trading yesterday. If that is repeated today, it would be the biggest gain since February 2003 for Round Rock, Texas-based Dell. The shares have lost 17 percent this year.

The company, whose accounting is under investigation by regulators, said net income was $677 million, or 30 cents a share, topping the 24-cent average estimate of analysts. To repair relations with U.S. consumers angered by poor service, Dell cut the time customers wait on support hotlines as it works to stem defections to rivals including Hewlett-Packard Co.

``The expectations going into the quarter were anemic, and the fact that they exceeded those expectations would mean the stock should react positively,'' said Sunil Reddy, who helps manage $22 billion at Fifth Third Asset Management in Cincinnati. ``The core operating metrics were pretty good.''

Sales in the quarter ended Nov. 3 totaled $14.4 billion, matching the average estimate of 22 analysts surveyed by Thomson Financial. Gross margin, the percentage of sales left after production costs, was 17 percent. That beat the 15.7 percent anticipated by UBS AG's Benjamin Reitzes, Institutional Investor magazine's second-ranked computer analyst.

The results are preliminary and shouldn't be compared with last year, spokesman Bob Pearson said yesterday. Dell postponed results last week and said the accounting review may lead it to restate previous earnings. Dell reported profit of $606 million on sales of $13.9 billion in the same quarter a year earlier.

Accounting Review

Dell's accounting is under review by the U.S. Securities and Exchange Commission and the Justice Department. Dell disclosed last week that the SEC had escalated its 15-month review to a formal investigation, which allows the agency to issue subpoenas.

The company said yesterday the U.S. Attorney for the Southern District of New York sought information about its financial reporting. At least 12 lawsuits have been filed by shareholders and participants in Dell's pension benefit plan.

The accounting probe comes as Chief Executive Officer Kevin Rollins, 54, is spending $150 million to fix customer-service problems that left U.S. buyers in what the company admits was ``Dell Hell.'' Dell added call representatives in the U.S. and said it cut the time customers spent on hold to three minutes from nine minutes a year earlier.

``The more important metric is sales and unit shipments,'' said Bill Fearnley Jr., an analyst with FTN Midwest Securities Corp in Boston. He rates the shares ``neutral'' and doesn't own them. ``If customers think the experience is getting dramatically better, we'll see that in sales.''

Shipments Drop

Dell lost the title of world's largest PC maker to Palo Alto, California-based Hewlett-Packard last quarter after leading for three years. Dell's shipments in the U.S., the world's largest PC market, fell 7.1 percent. Hewlett-Packard had a 6.3 percent gain in the back-to-school season, according to Stamford, Connecticut-based Gartner Inc.

Dell said yesterday notebook sales totaled $3.9 billion on a 17 percent rise in shipments. Desktop PC revenue was $4.7 billion as shipments fell 5 percent. PCs accounted for 59 percent of sales.

``The reaction is to wipe the sweat off your forehead because they came out with numbers that weren't maybe as bad as people were predicting,'' said Daniel Morgan, who helps manage $5.45 billion at Synovus Investment Advisors in St. Petersburg, Florida. He sold his Dell shares a year ago when gross margins fell and said he won't buy more until profitability improves. ``Dell has a lot of issues that they need to confront.''

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net .
Last Updated: November 22, 2006 00:03 EST

With Apple Computer within 10 cents of a new lifetime high ($86.40) we find it prudent to compare it fundamentally to peers.

S&P 1500's computer hardware group has the following names:



Using 15 key metrics, the companies are ranked from 0 (most overvalued) to 15 (most undervalued). Source: Bloomberg.

As you can see, it's somewhat difficult to compare them but using our sector ranking model it's worth mentioning that Apple ranks poorly and is infact overvalued compared to Dell, Palm and NCR. Much of Apple's price action is related to its star-power, a true favourite of any day-trader and high-flying fund manager. Regardless, we don't believe the Ipod maker is a sound investment for the short- to mid-term and that a significant pullback is warranted. In short, we expect sellers to emerge as the stock trades at these lofty levels.

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