Dell's latest quarterly earnings eclipsed analysts' expectations, an indication that Wall Street may be underestimating the extent to which the company has turned away from the consumer and tied itself to a corporate customer base.
Dell (DELL, news) founder and CEO Michael Dell has been doing his best to impress upon analysts and investors that nearly 80% of the company's revenue comes from selling servers, storage and services to businesses, governments and health care organizations.
Barely 20% of the Round Rock, Texas, company's business comes from selling PCs in the consumer market.
Dell's chief executive and others argue that the company is ideally positioned for a rebound in corporate spending on information technology. A fledgling recovery is under way now, although uncertainty about the recovery's sustainability lingers.
PC shipments to corporate customers rose by about 9% in the first quarter, while consumer PC shipments fell. Laptop sales in the United States have declined for three consecutive quarters, partly because of the growth of the popular iPad from
Dell appears on a daily ranking created using StockScouter, an MSN Money tool that identifies stocks with strong growth prospects in the near term. All stocks with Scouter ratings of 8, 9 or 10 are considered for the list, which is then shortened to exclude stocks with a trading volume below 50,000 shares a day. The remaining stocks are ranked on the basis of market capitalization, sector membership and whether they are growth or value stocks.
There's money to be made this year by selling PCs to both corporate customers and consumers, Dell officials said during a conference call to discuss the company's fourth-quarter financial results. Dell expects to increase sales of PCs to consumers at a faster rate than that of the overall market.
But whether Wall Street ultimately buys into Dell's transformation story turns on whether the company can convince investors it is no longer reliant on the PC market.
Dell's first-quarter PC shipments declined year over year for the first time in six quarters, and Needham analyst Richard Kugele subsequently cut his rating on the stock to "hold" from "buy."
Kugele acknowledged the strength of Dell's corporate PC business and said the company was "an emerging force in data center servers and services." On the consumer side, however, the analyst said he expects the company to continue to trail rivals in markets for cloud computing, tablets and smartphones. Plus, he added, margins could be squeezed in the short term because of component shortages related to the March 11 earthquake and tsunami in Japan.
On the bullish side, Thomas Smith of Standard & Poor's Equity Research cited a cyclical expansion of the PC business driven by higher IT spending in his recent upgrade of Dell to "buy" from "hold." Smith also raised his price target on the stock by $5 to $18.
Of the 34 analysts covering Dell, 11 rate the stock a "strong buy," two have "moderate buy" ratings, 17 rate the stock a "hold" and four have "strong sell" recommendations.
The stock has a StockScouter rating of 10, meaning it's expected to significantly outperform the market over the next six months with less than average risk.
| StockScouter top 10 | ||||
| Company | Sector | Dividend yield | Forward P/E | Scouter score |
|---|---|---|---|---|
| Eli Lilly (LLY, news) | Pharmaceuticals | 5.1% | 10.4 | 9 |
| PPL (PPL, news) | Electric utilities | 5.1% | 11.3 | 9 |
| Philip Morris International (PM, news) | Cigarettes | 3.7% | 13.5 | 9 |
| Gilead Sciences (GILD, news) | Biotechnology | N/A | 9.3 | 9 |
| Coca-Cola (KO, news) | Soft drinks | 2.8% | 15.6 | 9 |
| Procter & Gamble (PG, news) | Consumer staples | 3.2% | 15.2 | 9 |
| AT&T (T, news) | Telecommunications | 5.4% | 15.4 | 9 |
| Teva Pharmaceutical Industries (TEVA, news) | Generic drugs | 1.6% | 8.2 | 9 |
| Chevron (CVX, news) | Oil and natural gas | 3.9% | 7.8 | 10 |
| Dell (DELL, news) | Computer hardware | N/A | 11.9 | 10 |
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