<THE RULE MAKER PORTFOLIO>

The Dell Debacle?

By Al Levit ([email protected])

Glendale, CA (March 8, 1999) --

The rumors of my death have been greatly exaggerated.
-Sam Clemens (aka Mark Twain)

Same here!
-Michael Dell (February 16, 1999)

Obviously, the second quote is not for real, but it could have been. It seems that Mr. Dell's company, Dell Computer Corp. (Nasdaq: DELL), committed an unpardonable sin on Wall Street last month. For the previous 17 quarters, Dell had announced earnings that beat, and often trounced, consensus analyst expectations. Unfortunately, the earnings announced for the fourth quarter of fiscal 1999 only met analyst expectations. Even worse, the consensus estimate for revenues had been $5.5 billion, but the actual number came in at $5.17 billion. The Wise, in their typical fashion, sold first and asked questions later. And, as Tom reported a couple of weeks ago, the stock price nose-dived from $108 to about $80. (Recently, the stock has begun to move higher once again.)

Before I go any further, I need to point out to any new readers that I am not exactly disinterested when it comes to Dell. I bought my shares in the middle of 1997. In less than two years, those shares are now worth five times what I paid for them (which means that three weeks ago they were worth about six times what I paid). While I can't be completely objective about Dell, I can look at Dell with a longer term perspective than most of the Wisemen of Wall Street. It seems that all the people who sold Dell in the last three weeks, and dropped the price about 30%, either ignored or failed to properly discount the following positive news from Dell's fourth quarter earnings press release (figures in parentheses represent the 4th quarter of 1998):

  • 4th quarter earnings per share (EPS) increased 55% year-over-year.
  • 4th quarter sales grew 38% year-over-year.
  • Both gross and net margins increased.
  • Return on Invested Capital (ROIC), although down, was still a stellar 170% (vs. 217%).
  • Inventory turned over every 6 days (vs. every 7 days).
  • The cash conversion cycle (CCC) was negative 12 days (vs. negative 8 days).
  • Dell gained market share over its key competitors, growing the business at 3.5 times the rate of its competitors.
  • Ford Motor Co. (NYSE: F) announced it was standardizing on Dell computers.
  • Internet sales are now more than $14 million per day, equivalent to a $5 billion annual run rate.
  • International growth was also impressive. For example, growth was profitable in Asia-Pacific and revenue growth in that region was 30%, while unit ship growth was five times the market rate.
And on, and on, and on. You may not be familiar with a few of these items, like cash conversion cycle or inventory turns. These are asset activity metrics that companies like Dell and other Merchant Kings use to assess their performance. Compared to the vast majority of Merchant Kings, Dell's fourth quarter was outstanding. However, day trader James Cramer of TheSteet.com said that Dell had a "crummy quarter." It's a tribute to Dell that Cramer's view wasn't completely off base. Tomorrow, I'll continue this story by explaining why.

Last but not least, the results are in for our inaugural Question of the Week. Last week, we asked:

"What criteria should we add to the Rule-Maker scoring methodology?"

Out of the many excellent responses, the Rule-Maker managers were most struck by two short posts. Eddrom and Pov suggested that an inquiry from the Department of Justice (DOJ) is the surest sign of a company's monopoly stronghold. We believe this criteria has a uniquely Foolish ring to it. Congrats!

So, what do you think? Let's keep the discussion rolling on the Strategy message board with this week's Question of the Week:

"Should a govenment antitrust inquiry be added to the official Rule Maker Ranking Methodology?"

Assume the following proposed scoring:

  • 4 points: Antitrust trial within the past 5 years
  • 2 points: Antitrust investigation (but no trial) within the past 5 years
  • 0 points: No antitrust inquiry

Please post under the subject heading "Question - Antitrust." This week, we'll award a super-cool Fool ballcap for the best response(s).

See ya on the boards.

Al

03/08/99 Close

Stock  Change    Bid
AXP   -2 3/16  116.56
CHV   -  1/4   81.06
CSCO  +3 3/4   104.56
KO    +  1/16  64.00
GPS   +  3/16  69.94
EK    +  5/16  65.44
XON   +1 5/16  70.94
GM    -1       87.63
INTC  +5       119.63
MSFT  +4 1/16  159.00
PFE   +3       139.56
SGP   -1 3/16  55.81
TROW  -1 9/16  33.56
YHOO  +10 5/8  170.44

                   Day   Month    Year  History
        R-MAKER  +1.26%   5.33%   9.80%  38.93%
        S&P:     +0.57%   3.59%   4.67%  29.52%
        NASDAQ:  +2.59%   4.79%   9.35%  45.06%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    5/1/98   55 Gap Inc.      34.37     69.94   103.49%
    2/3/98   24 Microsoft     78.27    159.00   103.15%
   6/23/98   34 Cisco Syst    58.41    104.56    79.01%
    2/3/98   22 Pfizer        82.30    139.56    69.58%
   2/13/98   22 Intel         84.67    119.63    41.28%
   2/17/99   16 Yahoo Inc.   125.81    170.44    35.47%
   8/21/98   44 Schering-P    47.99     55.81    16.29%
   5/26/98   18 AmExpress    104.07    116.56    12.01%
    2/6/98   56 T. Rowe Pr    33.67     33.56    -0.33%
   2/27/98   27 Coca-Cola     69.11     64.00    -7.39%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     87.63    21.02%
   3/12/98   20 Exxon         64.34     70.94    10.26%
   3/12/98   20 Eastman Ko    63.15     65.44     3.63%
   3/12/98   15 Chevron       83.34     81.06    -2.74%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    5/1/98   55 Gap Inc.    1890.33   3846.56  $1956.23
    2/3/98   24 Microsoft   1878.45   3816.00  $1937.55
   6/23/98   34 Cisco Syst  1985.95   3555.13  $1569.18
    2/3/98   22 Pfizer      1810.58   3070.38  $1259.80
   2/13/98   22 Intel       1862.83   2631.75   $768.92
   2/17/99   16 Yahoo Inc.  2013.00   2727.00   $714.00
   8/21/98   44 Schering-P   2111.7   2455.75   $344.05
   5/26/98   18 AmExpress   1873.20   2098.13   $224.93
    2/6/98   56 T. Rowe Pr  1885.70   1879.50    -$6.20
   2/27/98   27 Coca-Cola   1865.89   1728.00  -$137.89

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1489.63   $258.74
   3/12/98   20 Exxon       1286.70   1418.75   $132.05
   3/12/98   20 Eastman Ko  1262.95   1308.75    $45.80
   3/12/98   15 Chevron     1250.14   1215.94   -$34.20

                              CASH    $185.03
                             TOTAL  $33426.28

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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