When Motley Fool Stock Advisor selection Dell (NASDAQ:DELL) broke under $35 in September and continued making new 52-week lows into November, there were a number of Fools here at HQ who began to murmur about the potential for a bargain.
We're always on the lookout for high-quality companies selling at a reasonable price, so when Dell's shares slid another 8% on an earnings warning a week and a half ago, one of my colleagues here in the office found the bargain too tempting. After digging a bit deeper and doing some valuation work, he put his money where his mouth was and bought some shares.
Since his purchase, my Foolish colleague -- who sits across from me -- has been patiently waiting for Dell to release its third-quarter numbers, which it did yesterday after the close. Having just reviewed the company's third-quarter earnings report and taken a quick glance at its future guidance, Dell looks very reasonable to me at $29.50 a share. But let's take a quick spin through the quarter before revisiting the valuation.
Dell's top-line revenue was up 11% on record volume, which is a positive. But then the negatives start to trickle in. The first of which is a $307 million charge for a faulty product in its OptiPlex systems. While one-time in nature, this is an operating item and investors should treat it as such. The other large item is a restructuring charge for "workforce realignment expenses," which primarily means severance packages for employees no longer required in its U.S. consumer business unit. Taking all the charges into account, Dell's earnings were down 24% versus last year to $0.25 per share. Excluding the product charge and restructuring charges as one-time items brings earnings up to $0.39 a share, which is 18% above last year's performance.
Looking at the rest of the financials, Dell's cash flow and balance sheet are as healthy as they have always been. On the balance sheet, Dell has a $9.2 billion dollar war chest of cash, cash equivalents, and short-term investments that it can use to expand or repurchase shares. And to the company's credit, it has been putting its free cash flow and some of its balance sheet cash to work repurchasing shares over the past few years. Even better, these share repurchases are occurring at a rate that more than neutralizes the options grants that it's handing out to its employees. All of this adds up to a repurchase plan that should actually deliver value to shareholders.
Dell's consumer business is slowing a bit and the company does face a slew of competitors such as Hewlett-Packard (NYSE:HPQ), Sony (NYSE:SNE), and Gateway (NYSE:GTW). But Dell is still the most efficient of the group and is poised for decent growth going forward. To that end, after running a discounted cash flow analysis based on free cash flow over the past two years, and making growth assumptions that are in the 6%-8% range, I think Dell is currently selling at a discount of between 20% and 25% to its actual value. Bargains like this for high-quality companies don't come along every day, and it looks like my colleague has made a very sound investment decision.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
