Dell Doubles Up in China

On Sunday, The Wall Street Journal broke the news (subscription required) that Dell (NASDAQ:DELL) would be selling its computers through Gome, the biggest electronics chain in China. Apparently, there are just too many store browsers in China -- consumers who aren't going to partake of the online ordering that is Dell's trademark in the United States. Retail-reliant Lenovo Group and Hewlett-Packard (NYSE:HPQ) lead China's PC market, and Dell undoubtedly would like to see its Chinese market share numbers more closely resemble their U.S. counterparts.

In other words, Dell, which has long shunned electronics superstores like Best Buy (NYSE:BBY), can no longer play hard to get. HP and Apple (NASDAQ:AAPL) have both proven that a retail presence doesn't have to be a drain on profits. In fact, it can be a big booster. But that demands stylish products that score well on the "me-wanty" meter, something Dell's dull, low-end plastic fantastics (like the clunker I work on at Fool HQ) have never delivered.

What will that mean for investors? Dell's previous deal with Wal-Mart (NYSE:WMT) had this skeptic wondering whether widening the race to the bottom on prices was really a path back to the top. I've still got my doubts. Being big in China hasn't guaranteed success for Lenovo Group.

But if anyone should be able to benefit from scale, it's Dell. Unfortunately, the past few years' margin picture shows stagnation in operating profits, even as gross margins have inched higher. Costs on the selling, general, and administrative line haven't done what we'd expect from a leader in lean operations.

Still, even a faltering business has its price. When I value Dell's discounted cash flows with a model that assumes very conservative growth (in the mid-single-digit range), I come up with a stock worth $32 and change. If Michael Dell can get a real turnaround accomplished, and Dell sees some margin expansion, that would make shares worth an awful lot more.