Motley Fool Radio Interview
With Dell Chief Financial Officer
Tom Meredith

Part 2

TMF: Moving things over to your professional life as a CFO, I want ask about the role of analysts -- an issue of concern to investors... especially when you take a step back and see the role of the Wall Street analyst who, in a number of cases, is ranked in the sales force by the brokers. There's a lot of flipping back and forth in their ratings... In the case of Dell, for example -- a company that one would have been best off by a long shot simply buying and holding eight years ago rather than worrying about the performance of the company over a three-month period -- a number of firms have actually done things as screwy as saying "we have a 'near term neutral' rating on Dell, but we are going to maintain our 'long-term buy' rating based on our concern about their second quarter report oncoming," which just came out this week and was excellent. I'm wondering how you interact with the analysts? What role do you think they play? Or just generally, whether you treat them as just kind of a nuisance, whether you're ignoring them or whether you're trying to influence them and whether you think the role they're playing is useful for individual investors?

"I think some of the fundamental research is what individual investors should look to and that old Peter Lynch saw. Sort of follow your instincts and just use your common sense and stick with what you know."
Meredith: I actually think the sell-side analysts have perhaps one of the more difficult jobs on the face of the earth and I think that job has gotten immeasurably more difficult in recent years -- largely because sell-siders have increased their span of coverage, the number of companies they have to cover, and frankly there's a lot of transformation occurring as result of new technologies convergence, the Internet, broadband... So, I think they have an extremely difficult role, one. Two, they are, in my opinion, people you have to reckon with, and as part of that reckoning you'd better be trying to influence them to understand what it is you worry about, what you are trying to drive in way of priorities, and frankly provide them visibility to your industry sector numbers. Three, that is short of, at least in Dell's case, giving them precise guidance. We only try to give tonal guidance around the space and let them make the call.

Sometimes they get it right on Dell, sometimes not. Your point, had you invested eight years ago and just held, you'd have been rewarded quite handsomely. Frankly, you could have come in three and a half years ago and been rewarded quite handsomely and I'm confident given where our P/E to growth ratio is relative to the S&P as a broad index and more broadly to what are considered the core technology investment holdings from Microsoft, Intel, Cisco, AOL and others -- I mean you pick. They're all trading at literally two or more times their growth rates and we're the only company, with exception of AOL, that has had revenues and bottom line growth above 40% in the first half of this year. You put that in a broader market context, imagine Dell has four and a half times a revenue run rate of AOL.

TMF: It is amazing, and it is amazing to take that statistic and that thinking and put it in the context of somebody who'd say "near term neutral". Which I think leaves out very broadly the real direction of the overall corporation and something that frankly we have questions about whether individuals should pay much attention to those ratings on a quarterly basis and instead focus their attention on the research that has been done?

Meredith: I think some of the fundamental research is what individual investors should look to and that old Peter Lynch saw. Sort of follow your instincts and just use your common sense and stick with what you know. In that context, what you know is that in Dell, you have a company that has consistently performed over a long period of time. Imagine HP talking about growth in the last three consecutive quarters. Let's talk about the last two and a half years where they had more misses than positives in terms of surprises. It's a great company, love HP, but on the other hand they're trading at over two times their growth rate. Dell's trading literally as of today at a little bit more than one times its growth rate. That, to me, is telling the momentum players you're on the wrong stock, and... it's telling the value players you're missing the proposition.

TMF: Possible inefficiency in the market place. Now, Tom, to close, I have to confess that Dave and I have been asked here at the end of August to travel down to Houston, Texas, and give a speech to Compaq Corporation next week, and I'm wondering if you'd have a message you'd like us to deliver during that speech?

Meredith: (Pause... Laughter) Geez... I think better for you to craft a message to the Compaq team than me, but if I were to truly have more than 30 seconds to think about this I might come up with something more profound.

TMF: You know, Tom, we'll carry it for you. We'll put the Fool caps on and we'll just talk about the efficiencies in the market place and the hard work that has to be done in the market where the margins have typically been low and therefore you really have to work on efficiency and Dell's been the front-runner in that category for some time.

Meredith: I would just pull out on a more positive comment that the low-cost model always wins and Dell is the fastest growing, lowest cost, most profitable, open systems vendor on the face of the planet by a wide margin, not by a little margin. So you can talk to me all day long about IBM in terms of their PC division's performance, but when you look at sequential, Q2 off Q1, they deteriorated by almost 100%. How's that getting better? And last time I checked, Compaq reported a loss. So, who's gaining share is pretty obvious.

TMF: Gaining share, gaining efficiency, improved margins, sales growth over 40% over last year in the second quarter. Fantastic year for Dell. And Tom Meredith, CFO of Dell, thank you very much for taking some time out and joining us to talk about the performance today.

Meredith: Thanks for having me, Tom.

Back to Part 1 of the Interview

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