What Do Earnings Tell Us About Dell?

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On Tuesday, floundering PC maker Dell (Nasdaq: DELL  ) announced financial results for the quarter ended July 31. Investors were not impressed, and shares fell more than 5% Wednesday. Here's what you should know, and a few conclusions you may be able to take away from its report.

The breakdown
Revenue was down $1.2 billion to $14.5 billion. Even sales in the BRIC countries -- the supposedly high-growth emerging markets of the world -- fell by 15%. Not good.

The company reported earnings of $0.42 per share vs. $0.48 per share in the year-ago quarter. This breaks out to profits of $732 million vs. $890 million for the same period last year. Technically speaking, the company still beat analyst expectations of $0.45 per share, as EPS excluding some items came in at $0.50.

While these numbers are certainly nothing to write home about, the real negative from an investor's standpoint was more about the gloomy future outlook, which makes it dubious that Dell is a turnaround play.

Dell cut its profit outlook by 20%, projecting fiscal 2013 EPS to come in around $1.70, compared with the company's estimate just six months ago of $2.13 per share.

It doesn't help that Microsoft's (Nasdaq: MSFT  ) Windows 8 won't come out until October, and many Dell customers -- the large majority of which are businesses -- are waiting on that release before upgrading their computers. With Gartner reporting global PC sales continued to barely edge up in the second quarter, Dell just doesn't look like it's on top of things. Although Microsoft mentioned that Dell would be one of four manufacturers to offer tablets with the new Windows RT software, if your catalyst for growth is entirely dependent upon another company, you're probably in trouble.

Microsoft itself is not exactly known as an innovator, and is struggling to compete with sleek rival Apple's "coolness" factor, which CEO Steve Ballmer isn't doing the best job of perpetuating. If you're a tech company piggybacking on the success of another tech company, at least pick one on the up-and-up. While it may not be at the helm of the next paradigm-shifting technology revolution, at least Microsoft has found its calling. Stock in the company has the ability to generate cash -- and a lot of it -- on its own with the Windows and Microsoft Office franchises. Plus, it pays a nice 2.5% dividend.

Dell, of course, would have you believe that it's the master of its own destiny. CEO Michael Dell was clear about de-emphasizing the lagging PC market and stressing the long-term strategic focus on enterprise solutions like data management server solutions. But at the end of the day, Dell remains unproven in these areas, and has gone on a spree of acquisitions to boost these business segments.  

Basically, Microsoft is a cash cow and Dell is a dog.

Watch out! It's a trap!  
While results were certainly underwhelming, Dell trades at just seven times earnings, far lower than the average industry P/E of nearly 25. This is where metrics like the P/E ratio can be misleading. On the face of it, the low multiple could make the stock look like a steal. But such a provincial examination of a stock's metrics can lead to an investment becoming a "value trap," where shares appear undervalued but actually trade for low multiples because they are in decline, so be wary.

If you tend to agree that the exciting growth in PCs is done for, The Motley Fool's special free report, "The Future is Made in America," is for you. In it you'll find what companies Fool analysts predict will benefit from the next major disruptive industry; read through it today for free.

Fool contributor John Divine owns Jan. 19, 2013, call options in MSFT at a $25.00 strike price, but owns no other holdings in either of the companies mentioned above. Although he did own a Dell laptop, which recently fried at the tender age of 5. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine.

The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft. Motley Fool newsletter services have recommended creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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