Another Reason to Not Buy Dell

Once again, I'm wading into dangerous waters. This time, though, the subject of my skepticism is Dell (Nasdaq: DELL  ) , the stock so nice that it's twice been named a choice of our investing newsletters. (Details below.)

So, what's my problem? Disclosure, for one. On Wednesday, Dell said it would need to delay its third-quarter earnings filing till the end of the month because of "complexity" it faces in closing its books. And that's on top of a still-to-be-filed 10-Q report for the second quarter.

Part of the problem is the SEC, or so says Dell. Regulators are formally investigating the company and its financial reporting practices. Apparently, they've turned up something because, in September, the audit committee of Dell's board discovered problems with "accruals, reserves, and other balance-sheet items."

No one knows for sure what that means, but it's certainly possible that, either mistakenly or purposefully, Dell massaged its revenue recognition policy to meet the Street's demands. Regardless, a financial restatement of some sort seems to be increasingly likely.

So why are brilliant value investors such as Wally Weitz snapping up shares? Foolish editor Mike Olsen, who has a position in Dell, explained to me yesterday that cash flow wouldn't be injured in a restatement. He also says there's enough juice left in the global PC market to support 7% to 8% cash-flow growth for the next several years, which would value Dell's shares at $34 to $36 a stub.

Maybe he's right. Still, the bigger issue to me is the lack of evidence supporting Dell's so-called competitive cost advantage that it has long used in dominating rivals. Hewlett-Packard (NYSE: HPQ  ) , for example, sports a 7.5% margin on earnings before interest and taxes. Apple (Nasdaq: AAPL  ) earns 13.5% on that line. And Dell? It has dropped to 7% after years of trending between 8% and 9%.

Meanwhile, HP is now the PC market leader worldwide, according to research firms IDC and Gartner. A reader responding to our Foolish forecast for HP doesn't believe that position is sustainable because of extraordinary discounting, but I'm inclined to disagree. After all, Capital IQ shows that HP's returns on capital and equity are rising just as Dell's are falling. Despite ethics troubles, HP CEO Mark Hurd seems to me to be getting a lot right.

And then there's the SEC probe and the late filings. With earnings visibility lacking, regulatory action likely, and a competitive advantage that's waning, or maybe even gone, Dell has never looked worse, even for a growth-stock cheapskate like me.

Disagree? Get into Motley Fool CAPS now and tell us what you think.

Then, when you're done, boot up with related Foolishness:

Dell is a choice of both theMotley Fool Inside ValueandMotley Fool Stock Advisorservices. Get 30 days of free access to either one right now.

Fool contributorTim Beyers, ranked 1,199 out of 13,389 players inMotley Fool CAPS, vows to never go back to a PC now that he owns a Mac, which he used for writing this story. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on which stocks he owns by checking Tim's Foolprofile. The Motley Fool'sdisclosure policyis always in compliance.

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