Dell Just Keeps on Pleasing (Breakfast News) November 12, 1999


Friday, November 12, 1999

"Creative minds always have been known to survive any kind of bad training."
-- Anna Freud

Dell Just Keeps on Pleasing

By Richard McCaffery (TMF Gibson)

Dell Computer (Nasdaq: DELL), the world's largest direct sales computer company, last night reported net income (excluding charges) of $483 million, or $0.18 per share, for the third quarter, compared to $384 million, or $0.14 per share, a year ago. The results were in line with reduced analyst estimates, according to First Call.

A 72% increase in sales of enterprise products helped grow revenue to $6.7 billion. Operating expenses decreased to 10.6% of revenue from 11.4%, and net margins fell to 7.1% from 8% as a result of a 25% increase in the cost of memory products. Dell still managed to generate $1.1 billion in cash from operations, up from $586 million a year ago. A portion of the cash was used to repurchase 15 million shares of stock.

Wait a minute. According to Bloomberg, Dell reported net income of $289 million, or $0.11 per share, down 25% from net income of $384 million, or $0.14 per share, a year ago.

What's an investor to do when the numbers look different? In this case, it's pretty clear cut. The decrease in net income is due to a $194 million charge for the acquisition of ConvergeNet Technologies, a privately held storage network company based in San Jose, California. Dell spelled it out in the press release and Bloomberg explains it farther down in its story.

Nevertheless, Bloomberg gave prominence to Dell's actual earnings after the acquisition charge, which resulted in negative earnings growth for the quarter. It's a perfectly accurate view of the company's finances. Dell and Reuters, on the other hand, excluded those charges at first glance and underscored a much higher number.

Is that an inflated view of where the company stands? Not at all. It's standard operating procedure. The idea behind excluding charges is not to obscure financial reality. Rather, it's an effort to give investors a look at the real earnings power of a company.

To see what's really there, investors need to separate one-time charges, extraordinary items, and unusual items. It's like the 40-yard dash at football camp. The coaches don't put a tackler on the field because they want to see the player's pure speed.

Unfortunately, it can get complicated quickly as companies report all kinds of different numbers that they believe illuminate the income statement. Some companies exclude options expenses, others want investors to focus on earnings before interest, taxes, depreciation, and amortization (EBITDA), others report cash earnings.

In addition, it can get tricky figuring out which items are really extraordinary. Suppose a large manufacturing concern with lots of factories closes a plant and takes a restructuring charge. That "unusual" item would be excluded, but manufacturers close factories all the time so how unusual is it?

There are many different viewpoints on these matters. On the whole, the issue illustrates one of the best reasons for buying and holding stocks. Over time, investors become very familiar with their company's sales cycles, earnings, business needs, etc., and it gets much easier to assess the numbers in context.

Oh, and once again, a great quarter for Dell.

News to Go

Struggling aerospace defense contractor Lockheed Martin (NYSE: LMT) may sell or close some of its satellite and military aircraft operations as part of an effort to restore financial strength, The Wall Street Journal reported.

Hardee's, Taco Bueno, and Carl's Jr. owner CKE Restaurants (NYSE: CKR) plans to cut about 150 jobs in the next eight months at Hardee's headquarters in Rocky Mount, North Carolina as part of an effort to consolidate. The company expects third-quarter earnings to fall below analyst estimates because of delays in the company's turnaround as well as seasonal trends.

Telecommunications equipment maker Datum (Nasdaq: DATM) rejected an unsolicited $58 million takeover offer from Frequency Electronics (AMEX: FEI). The company's board believes remaining independent will offer shareholders the best return.

Automaker Ford Motor (NYSE: F) has moved a step closer to spinning off Visteon, its auto parts division, by making plans to name Vice Chairman Peter Pestillo its chairman and chief executive, Bloomberg reported.

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