Not all that long ago, if you didn't have a PC for some reason, you needed one fast, and even if you did have a PC, you needed a new one. Dell (NASDAQ:DELL) capitalized on that atmosphere by nailing down the model of getting customized PCs to customers quickly, without any of the headaches associated with stocking a lot of inventory. In other words, Dell's just-in-time model of building and delivering PCs was revolutionary, giving the company a certain amount of sex appeal.
Today, I look at Dell's stock, and I think about Wal-Mart (NYSE:WMT) or, worse, Florida Rock (NYSE:FRK). The computer-hawking business isn't nearly what it used to be, and the company's model doesn't seem unique anymore. Competition has gotten much tighter, too, with Hewlett-Packard (NYSE:HPQ) seeing a bit of a renaissance and Asian manufacturers such as Lenovo, which purchased IBM's personal-computing division, getting ever tougher. That, combined with customer-service troubles, has caused Dell's stock to sag from around $40 at the beginning of 2005 to a low of just below $20 in July.
Dude, Dell is dull!
Boring money is just as green
With a recent upgrade from a Goldman Sachs analyst, the stock is now officially a "turnaround" candidate. Now, don't get me wrong -- I've read the news and I've heard the execs apologizing for poor performance, but I couldn't help noticing that in the most recent fiscal year, the company managed to post a pre-tax return on shareholder equity of more than 100%. Not bad for a turnaround candidate!
The PCs that compose Dell's primary business line are pretty much a commodity these days. But Dell's business model lets the company stay neck-and-neck with HP on operating margin, despite Hewlett's much-ballyhooed and very profitable printer business. Dell's also able to easily outpace competitor Gateway (NYSE:GTW), which is struggling to keep operating profit in the black. On top of that, Dell maintains a notably clean balance sheet, with more than $8 billion in cash and short-term investments against just $500 million in debt. And while Dell continues to spend cash to buy back stock, it also continues to augment its cash position. It has generated more than $1 billion in cash per quarter and is spending a relatively small amount on new capital expenses.
PCs make me sleepy
Dell recently took a hit when research firms IDC and Gartner released the new estimates on PCs shipments. Worldwide, HP passed Dell with a 16.3% market share, versus Dell's 16.1%. In the U.S., Dell managed to hang on to the lead with 31% market share to HP's 22%, but Dell was still down from 33% versus Q3 2005, while HP was up from 20.4%.
Meanwhile, because anyone marginally adept with electronics can build his or her own PC without too much grief, generic PC manufacturers and companies such as Tiger Direct and NewEgg, which cater to the do-it-yourself crowd, have been busy gnawing away at the margins that come with selling those big, clunky boxes.
Now, nobody wants to give away business, but if there's a worthy candidate for doing just that, it's probably the selling of PCs. It's a low-margin and increasingly competitive business, and it just isn't very attractive these days.
The PC division is still Dell's largest, but that's quickly changing. Faster-growing, more attractive sectors have been catching up to PCs, most notably the Mobility division, which includes sales of laptops, MP3 players, and PDAs. Dell's success in selling MP3 players and PDAs has been nothing to write home about, but laptops likely represent a faster-growing and more profitable source of revenue. Though Dell's laptop business faces tough competition from a raft of firms, including HP, Gateway, Acer, Lenovo, Sony, and Toshiba, the area is, at least for now, much less commoditized than PCs.
Software and peripherals -- notably displays and printers -- as well as servers, services, storage, and financing through Dell Financial Services are all smaller components of Dell's revenue. Yet are all faster-growing business segments than the PC business. These areas also represent more profitable avenues for Dell.
All hail the enterprise
Though it sends out more than their fair share of catalogs, and puts up plenty of TV and Internet ads aimed at the consumer market, Dell gets only about 15% of its revenue from consumers in the Americas. Of course, given that the operating margin on these sales is about 5%, this is probably a good thing. Just a little more than 50% of Dell's revenue comes from business sales in the Americas, its most profitable area, with an operating margin around 10%.
The obvious reason for the margin disparity between business and consumer customers is that business customers are typically less price-sensitive, and they're buying more of the higher-margin items such as storage, high-end printers, and enhanced services. Despite the size of the revenue contribution of business sales, that area also has been growing faster than consumer sales; it has tripled the consumer growth rate for the fiscal year ended February 2006.
I consider this entrenchment in the business segment to be a huge plus for Dell, since customers in this segment provide as close to a recurring revenue stream as you're going to get in this industry. Business customers tend to be more sensitive to things such as delivery timing and service, whereas consumers' customary focus on price. Being established in business accounts also gives Dell a platform into which it can continue to grow some of its smaller business lines, including printers and storage.
Going abroad
Back in 2003, Goldman Sachs research suggested that Brazil, Russia, India, and China could account for more than 40% of the world's population and nearly $15 trillion in gross domestic product by the year 2050. The report speculated that China and India would become powerhouses in goods and services, while Russia and Brazil would see success in the area of raw materials. A follow-up report in 2004 suggested that the growth in these countries would boost 200 million people over the $15,000 annual income mark by 2025. That rise in income would mean an increased demand for higher-end goods -- such as, say, computers.
These so-called BRIC countries are fueling growth for all kinds of retailers, from Wal-Mart to Yum! Brands (NYSE:YUM) to Starbucks (NASDAQ:SBUX), and much of the same could be ahead for Dell. Currently, Dell sports low-single-digit market share in key markets such as India, but it has been seeing growth in excess of 50% year over year. If Dell is able to establish a presence in China and India similar to what it has in the U.S., the company could see some juicy growth as the technology sectors of those economies continue to grow by leaps and bounds.
Keep it simple
Similar to the conclusion of fellow Fool Emil Lee, I don't imagine anything here will be thought of as groundbreaking in terms of why Dell is worth owning. The thesis is simple -- Dell has plenty of room to grow further, and it continues to do what it does better than anyone else. Selling computers sure ain't the gig it used to be, but when you're putting billions of dollars in the bank doing it, I won't complain. Heck, find me a good rock pit that's making money, and I'll be right along side Peter Lynch buying it up.
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Fool contributor Matt Koppenheffer owns shares of Dell and hopes that it keeps up its dull ways. The Fool's disclosure policy is always exciting and never underperforms the market.
