What's Dell Worth Without Computers?

Seemingly flailing around for answers to a dramatically different PC market, Dell (Nasdaq: DELL  ) could either be a great deal for a stock or a money pit. The company would love to move toward its higher-margin business customers, but it still releases new consumer computers. This led me to wonder what would happen if Dell jettisoned consumers altogether. Let's look at how that move could affect the struggling computer giant's stock price.

The ugly numbers
From an all-time high consumer-market share of 18% in 2005, Dell has since fallen to 9%. With the onslaught of Apple (Nasdaq: AAPL  ) , which if you include tablets is now the leader in personal computers at more than 15% of market share, according to Asymco, Dell has struggled to entice customers with new offerings. Its Dell Streak tablet lasted a little over a year before being scrapped. While that was longer than Hewlett-Packard's (NYSE: HPQ  ) TouchPad lifespan of two months, the company has yet to launch another tablet to capture a share of the fast-growing iPad market. The company has said it will be releasing a new tablet soon with Microsoft's (Nasdaq: MSFT  ) new Windows 8, but Dell will then have to compete with Microsoft's own new tablet, the Surface.

What if Dell gave up trying to sell to consumers? After all, while the consumer business brings in 18% of Dell's revenue, it contributed only 1.1% to total operating income. What would Dell stock be worth if it spun off or just stepped out of selling consumer computers, as HP considered?

A "dude"-free Dell
Dell's three other business units that focus on enterprise, public, and small and medium business have operating profit margins ranging from 9% to 12%, whereas the consumer unit had an operating margin of 0.5% last quarter. If you subtract out the revenue from Dell's consumer business, Dell will obviously sell 18% less per year but will lose only a little more than 1% in profit. Even using the conservative whole business profit margin that currently includes the low-margin consumer segment of 5.1%, Dell would earn $1.38 per share without the consumer business. At its price-to-earnings multiple of 6.5, this gives Dell shares a value of $8.97.

However, Dell also has a large net cash pile. That is, taken all its cash and subtracting its liabilities, Dell sits on $3.45 billion in cash. This works out to be a little less than $2 per share in net cash, and it puts Dell's value right around where it's trading now a little below $11 per share. There are, of course, many assumptions to this value.

Keeping businesses interested
The Global Consumer unit and the Small and Medium Business unit were the two that declined in revenue and profit, while the Public and Large Enterprise unit grew in both revenue and income. The switching cost to move from one computer vendor to another for large companies, governments, and schools is higher than for small businesses and consumers, which helps Dell hold on to big clients in the near term. But Dell will need to continue satisfying these customers to keep them in the long term and eventually grow their customer base.

If small and medium businesses, which contribute more than 30% to Dell's operating profits but have an easier time dropping a vendor, ditch Dell, it would be much more trouble than losing consumers.

Using cash wisely
Dell also needs to spend its cash on the right things. This year, Dell has already announced six different acquisitions, from network security, hosting, and database companies that should help it serve its higher margin business, government, and education customers. Dell seems to follow the model of IBM (NYSE: IBM  ) , which itself plans to spend $20 billion on acquisitions between 2010 and 2015 and focuses on smaller companies that deal with commerce, cloud, and analytic services. However, there's always the risk of overpaying for acquisitions, failing to properly integrate a new line of business, or just spending on the wrong things.

If Dell squanders its cash, which currently makes up about 20% of its share value, investors could easily lose the same in share price.

A matter of faith
Even without the consumer business, Dell seems priced fairly. This does assume, however, that Dell can keep its larger customers and will spend its cash where it can have the greatest returns. But if you have more faith in Apple's ability to trounce any competitor, take a look at our brand-new premium report that details the risks Apple faces, along with key areas to watch for the future. Or, if you think Microsoft's new hardware venture could prove promising, check out its premium report that gives you three other reasons to buy the software giant.

Fool contributor Dan Newman does not holds shares of any of the above companies. Follow him on Twitter, @TMFHelloNewman. The Motley Fool owns shares of Apple, Microsoft, and IBM. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple, creating a bull call spread position in Apple, creating a synthetic long position in IBM, and creating a synthetic covered call position in Microsoft. We Fools don't 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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