Please excuse my enthusiasm. I've been screaming at the top of my lungs about Dell's
But enough about me (and the biases I'm very proud to have) -- let's talk Dell. The stock was up more than 12% yesterday. In the fourth quarter, the company once again shrugged off a miss by fellow enterprise-focused peer Cisco
And for the fiscal year diluted GAAP EPS almost doubled-from $0.73 to $1.35.
Wall Street is wrong about Dell
The story the Street is telling is that superior gross margins (up 4.40% to 21% in Q4 from 16.6% a year earlier, and 18.5% for the fiscal year) are responsible for the bounce, and that competitors will eventually pick away at those margins, causing the stock to fall.
Don't believe it. The fiscal year's gross margin of 18.50% isn't that far off the long-term average, and the company's acquisitions have rapidly diversified it into higher margin areas than in the past. Enterprise solutions and services revenues now represent 29% of Dell's revenue, and those sales were up 27% for the full year. Compared to Hewlett-Packard's
But more importantly, what the Street is missing is that the stock was already terribly undervalued to begin with, and is still undervalued now.
A good look at Dell's real valuation
Using the "whole firm" valuation methodology I used previously and a 9.5% WACC (weighted average cost of capital), the stock is worth $23.54 versus the current price of $15.41. And that $23.54 assumes the company stops growing ... for all of eternity! So even if the economy stays in a perpetual purgatory of slow or no growth, the stock is still priced for great returns.
To look at Dell's valuation another way, the company throws off a minimum $3.5 billion in free cash flow to shareholders (not including balance sheet financings), and can still be purchased for $29.75 billion. That's a massive 11.8% free cash flow yield on your investment.
And while Hewlett-Parkard and IBM are themselves cheap, comparing Dell's 11.8% free cash flow yield to Hewlett-Packard's 7.7% and IBM's 8.5% shows what a bargain Dell really is. And since more than a quarter of Dell's market cap is in net cash (a larger percentage than the others), the 11.8% understates the real undervaluation.