The computer hardware sector is not the place to be if & # 39; the world's largest economies – the US and China – are embroiled in a bitter trade conflict that could derail global economic growth and the spending of both consumers if large companies would shrink
In the midst of this uncertainty, however, there is one stock that holds up surprisingly well. And that is the reborn Dell Technologies Inc (NYSE :). After a new listing on the New York Stock Exchange in December, the shares increased by more than 45%, compared to only 9% profit achieved by the closest competitor, Hewlett Packard Enterprise Co. (NYSE :). Dell shares closed 0.3% yesterday at $ 66.41.
What makes investors enthusiastic about Dell? Dell went privately in 2013 to transform its business from a hardware vendor to a diversified company that could have a significant market share in the growing areas of the digital economy, including storage, servers, data protection, and networking.
Just before it entered the public market again last year, Dell merged with EMC Corp (NYSE :), forming a technical powerhouse with an annual sales forecast that would hit $ 95 billion in the current fiscal year, compared to around $ 57 billion when it left the public stage. At that level, Dell would rank as the fifth largest publicly traded technology company in the United States through annual revenue, just below Microsoft (NASDAQ :).
The larger Dell is more powerful
The pivot of founder and CEO Michael Dell's strategy has been to create an integrated company that can bring customers from one unit to another and generate higher sales and profits to compensate for those with lower margin from Dell. The addition of the higher-range data collection from EMC offers opportunities for cross-selling, while the 82% interest in VMware, which offers digital infrastructure to more than 500,000 customers worldwide, contributes to profit.
The most recent evidence of this power came yesterday when Dell reported its latest, surpassing EPS Street Wall estimates. Aided by companies' strong demand for personal computers and services, Dell's earnings rose to $ 1.45 per share, excluding one-off items, from the consensus forecast of $ 1.20 per share. PC unit sales increased 6.2% to $ 10.9 billion, while business sales increased 13% as a result of the increasing demand for its PC & # 39; s subscription services.
The larger size and varied offers from Dell, however, did not come without costs. Some analysts have expressed concern about the huge debt burden on the company's balance sheet, which rose to $ 49 billion after acquisitions. This indebtedness is not a problem if the turnover increases and the company makes a profit. But computer hardware is a very cyclical company that could experience a strong slowdown in growth if the economy slows down or trade rates escalate consumer costs
In its forecast for the 2020 fiscal year, Dell had warned that sales growth will slow the following year, hurt by global economic problems that could weaken companies' demand for hardware products.
These concerns, as well as the integration of the company, which is still a work in progress, have depressed the valuations. The stock is trading at just nine times the earnings forecast for the 2021 tax year, a discount on the industry's P / E multiple of 14.
Bottom Line
There are more reasons to value Dell's stock than to hate it after the restructuring and expansion of the company. With its market-leading positions in many product categories, Dell's new business mix is ​​much more powerful. It is now more resistant to the cyclical headwind than many of its competitors, which are heavy on the hardware side.
But after a powerful rally, the stock reflects this dynamic in the short term. In the longer term, we believe that the positive results are much greater than the negative factors, making Dell an attractive addition to any portfolio when the price becomes favorable.
