If two Fools can't agree in our weekly Dueling Fools feature, how about more than 8,000? That's how many investors are donning their game faces and digging into the Motley Fool CAPS community stock-rating feature. We've spent the past few Fridays digging into what some of your fellow market watchers have to say on some of the market's most popular stocks. This week we turn to Dell Computer
Yes, that amazing company with the oversold story of Michael Dell starting a personal computing empire by assembling systems out of his dorm room in Austin, Texas. Dell became the envy of the industry with its sleek consumer-direct model.
Lately, things haven't been going so well for Dell. The company that used to trounce estimates is now hosing down targets. Its CEO is in the hot seat. There's so much going on at Dell that I just couldn't keep active CAPS players from sharing why they're long -- or short -- in the interactive stock market simulation.
All's well that sends Dell
Despite its sluggish share price, the case for Dell doesn't seem that hard to make. Microsoft
Let's see what some of your fellow investors had to say about Dell Computer on CAPS:
Speaking of the unloved. I like to look at comparable numbers in a broader context.
Five-year sales growth rate? Dell 11.88%, Hewlett-Packard
(NYSE:HPQ)12.15%, and Apple Computer (NASDAQ:AAPL)11.78%.
Five-year earnings-per-share growth rate? Dell 12.38% HP -13.78%, Apple 7.39%. The Dell P/E is nearly half that of Apple and HP. Factor in Dell's cash per share and you are talking about a P/E of 12.78!
Despite the fact that the consumer is waiting for Vista, Dell has been able to generate nearly $4 billion in free cash flow. Think about that for a minute. When you run that number through a DCF with a modest 11.5% growth rate, an intrinsic value of nearly $30 can be found. Factor in the current share price and you're talking about a mega cap trading with a 25%-30% margin of safety. It should also be mentioned that the ROIC-WACC spread is more than 65%. That means that Dell is creating 65 cents of value for every dollar invested. That number really speaks for itself. For Dell to be fairly valued, it would only have to grow at 3% going forward. Anyone think that is not possible?
The stock is down 50% over the past year vs. a flat S&P 500. This is an evergreen type of stock; in my parlance, that's one that you should tend to add to as it drops. Look at that balance sheet -- despite the sell-off, DELL remains financially very strong.
On a personal level, I'm a longtime Dell customer who's waiting to buy my next Dell or two until Windows Vista comes out. How about you? I think there are a lot of people like me, and the delay has hurt Dell. But that dynamic will go away within 8 months. I also don't think Michael D. is going to sit back passively through another loss of $50 billion of market cap, and increased Dell focus on DELL is good for all of us.
As I called Merck
(NYSE:MRK)to bounce back in the face of negative sentiment, that's my feeling about DELL now, too.
OK, the truth is, I've taken my lumps on this one lately, probably like everyone else. However, the total nosedive seems overdone. Fears that Dell will slow in the coming years have over-penalized a company that is extremely well run. Another company that Mr. Market has put on fire sale in the past few months.
I work for Dell, and I'm confident that once the company gets past the battery recall (it's a mere blip), and a strong positioning on business and home computers, servers, etc., this stock will do well. Dell is no longer a growth stock, but the business still has room to grow. When Window's Vista comes out, there will be an increase in computer sells .... good for Dell, and other computer manufacturers.
I couldn't help but notice Dell's current one star CAPS rating and wondered if this might be another nice underperform call I could add to my CAPS pick list.
But what's the reason for the one star rating? Horrid balance sheet? Well, no. Dell's balance sheet looks pretty darn good. Cratering earnings? Uh, not really -- Dell's earnings grew quite nicely over the past couple/few fiscal years. Declining revenues? Nope. Trouble with cash flow? Well, no again -- Dell still generates a rather healthy amount of the all-mighty greenback.
The next thing I noticed was that some of what I consider to be the brightest minds in Fooldom were lining up, not to short Dell, but to call outperform. Hmmm....
CAPS rating a contrarian indicator? Well, in the case of Dell, it sure looks that way to me.
Dell is not so well
Of course, not everyone is bullish on Dell as a turnaround prospect. Of the nearly 1,300 who have voiced an opinion on the computer giant, 384 feel that the shares will underperform the market.
Let's see what some of your more bearish fellow investors had to say about Dell on CAPS:
All Dell has going for it is low pricing. Unfortunately, its competitors can match and often beat them. HP is killing them in the enterprise space and Sun
(NASDAQ:SUNW)just nudged Dell into fourth position for business server sales.
Dell recently abandoned its digital music strategy.
Dell was once known for its excellent customer service. Sadly, this was sacrificed to save money. Now the customer service stinks. Dell's retail stores are a joke -- you can't actually leave with a computer -- you can only look at them. Now it is trying to sell televisions. Who on earth is going to buy a TV from Dell when a less expensive one can be bought from a reputable TV manufacturer?
Surely, Dell's television initiative will go the same way as its digital music players.
Dell is spending cash reserves in an attempt to prop up the stock price while insiders cash in their options. Dell's executives are leaving for Lenovo. The Market is in denial about the poor shape that Dell is in. This stock is set to implode.
This strikes me as a classic value trap. Certainly, Vista is a short-term catalyst, but what comes after that? Sure, Dell has plenty of cash. And there's no doubt that it still has a very efficient and lean manufacturing operation. But, really, where's the long-term advantage? Price? See Lenovo. Notebooks? See Lenovo again.
No company in the history of the stock market has ever cut its way to outperformance, but that's exactly what Dell is trying to do. Color me skeptical.
Dell continues to be a weak stock. What used to work for Dell no longer does. Sure, it may make billions but it has have already lost its "wow" factor. Other companies such as HP are right behind Dell. If anything, I would say that HP is doing a better job than Dell (in many aspects). The only bright side to Dell is that it recently added AMD
(NYSE:AMD)chipsets to the lineup.
While I have bought my last 3 computers from Dell, I'm less than enthused by its (recent) attempts to further segment its market by introducing the "XPS" line at a tremendous increase in price-point. I used to buy the "hottest, smokin'" PC available, but I don't think that what Dell offers (vis-a-vis HP) is a "good deal" anymore. I think that future buyers (including myself) will examine other offering before "automatically" buying Dell the next time.
Dell built its business on convenience, both in buying and service. Although purchasing a Dell is still convenient, its reputation for customer service is so low that it will take years to change the public perception.
Looking inside and outside of the box maker
Dell has come full circle. There may be no better proof to that than pointing out that a few years ago, Dell was a popular Motley Fool Stock Advisor recommendation. More recently, it has been singled out as a Motley Fool Inside Value stock pick.
Dell remains an active selection in both newsletters, showing that at least two market-beating analysts believe that Dell can be a growth stock in a turnaround stock's body.
Do you agree? Do you see things differently? The best way to let your voice be heard is to join the fray and share some thoughts of your own.
Motley Fool CAPS is a new community-driven experience where individual investors pool their knowledge to seek out superior stock ideas. Are you up for the challenge? Go ahead and give it a shot .
Longtime Fool contributor Rick Munarriz learned to swim at an early age, so he doesn't fear diving into the community pool. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy .