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DELL COMPUTERCORPORATION

James Hsu
http://www.dell.com/us/en/gen/default.htm

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Outline

Executive Summary Industry Overview

Company Description

Business Strategies

Quarterly Income Statement

Competitors

Ratio Comparison

Porters Five Forces

Stock Performance

News and the latest developments Discount Cash Flow

DuPont Method

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Executive Summary

Recommendation: Hold

Original Purchase: 500 shares @ $41.75 on 12/10/99

Current Price: $28.33 on 11/26/02

DCF result: $20.11 ~ $24.58 assuming 17% sales growthrate over next 5 years. $25.14 ~ $30.73 assuming 20%sales growth rate.

Sales growth rate from previous 5 years: 32.06% Analysts consensus on growth rate for next 5 years

according to MarketGuide.com: 16.99%; Its significantly

lower than the previous 5 year growth rate.

At $28.33, Dell stock is fairly priced, if not slightly

overvalued. However, the Company keeps grabbingmarket shares, and the quarterly numbers continue toimprove. Also, its financial strength has been excellent.

Bottom Line: A great company richly priced. Its worth

holding but look somewhere else for better return.

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Industry Overview:

Computer and Peripherals Industry

Its been a tough year for this industry. Companies hasbeen postponing their IT equipment spending until theeconomy is recovering.

In the third quarter 2002 total PC shipment was 30.6million units, down from 34.6 million units from the samequarter last year.

Many companies purchased a lot of equipments in 1999to handle enormous amount of data for 2000. Thereforetheres little need for them to buy more equipment in2000 ~ 2002. The economical downturn and 9/11terrorist attack slowed down IT spending as well.

However, companies cant defer upgrading IT equipment

forever. Sooner or later, they have to resume their long-delayed IT projects. Valueline predicts that expenditureon hardware equipment and software should rise bysome 7%~8% in 2003.

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Industry Overview (cont.):

Personal computers have become commodity.

Competition is severe in this sector and margin is low. Lower-end computers (below $1000) with high-speed

internet capability become the main selling force for PCcompanies. Dial-up internet will continue to fade away,and people need to upgrade their computers to satisfy

the demand of high-speed internet. Competition in peripherals (PDA, printers, etc.) is also

intense. New entrants will drive the margin down evenfurther.

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Company Description

Dell Computer Corporation, incorporated in October1987, is a computer systems company and a provider ofcomputing products and services.

The Company's primary product offerings includeenterprise systems, notebook computers and desktopcomputer systems. The Dell line of high-performancecomputer systems includes PowerEdge servers,

PowerApp server appliances, PowerVault storageproducts, PowerConnect networking products, DellPrecision workstations, Latitude and Inspiron notebookcomputers, and OptiPlex, Dimension and SmartStepdesktop computers.

The Company also markets and sells Dell/EMC storageproducts under a long-term strategic relationship withEMC Corporation.

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Company Description (cont.):

The Company provides targeted services for consulting,

deployment and support, as well as an extensiveselection of peripheral hardware, including hand-heldproducts, and computing software.

The Company conducts operations worldwide throughwholly owned subsidiaries. Sales outside the United

States accounted for approximately 35% of theCompany's revenues during the fiscal year endedFebruary 1, 2002 (fiscal 2002).

Two types of customers: Relationship and Transactional.

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Business Strategies (cont.):

Aggressive pricing strategy to maximize market share:

Result:1. Industry-leading results in fiscal 2002 as year-on-yearunit shipments increased by 15% while industryshipments declined 5%, resulting market share gain inevery region and product line.

2. The Company widened its leading as the worlds No.1supplier of PC systems (treating Compaq and HP as twodifferent companies).

3. However, the gross margin declined to 17.7% from20.2% the previous year.

Reducing workforce and exiting certain facilities to furthercut cost:

Result: Total charges recorded were $105 million. Butexpected to result annual saving of nearly $500 million.

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Business Strategies (cont.):

Continue to grow in enterprise systems:

The Company announced that it has expanded its line ofnetwork storage systems with the new Dell EMC CX600,a Fiber Channel storage array that offers enterprisecustomers high capacity, performance and availabilitywhile easing the deployment of storage hardware andsoftware.

Entrance of printer business:

Dell Computer Corp. and Lexmark announced anagreement for the two companies to develop andproduce Dell inkjet and laser printers and relatedaftermarket cartridges that will be sold directly tocustomers.

Entrance of PDA business: Axim X5

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Competitors in PC industry:

U.S. top five players:

U.S. PC market Share

DELL

25%

COMPAQ

13%HP

9%

GATEWAY

7%

IBM

6%

OTHERS

40%

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Competitors in PC industry (cont.):

Worldwide top 5 players:

PC sales slumpAlthough overall PC sales fell 12 percent worldwide in the thirdquarter of 2001 from a year ago, Dell's sales increased.

Company

Shipments (millions)Market

shareGrowth from 3Q

2000

Dell 4.23 13.8% 10.8%

Compaq 3.18 10.4% -31.1%

IBM 2.00 6.6% -17.2%

HP 1.95 6.4% -24.6%

NEC 1.05 3.4% -27.5%

Others 18.17 59.4% -7.8%

Source: Gartner Dataquest

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Worldwide PC market share

DELL

14%COMPAQ

10%

IBM

7%

HP

6%

NEC

3%

OTHERS

60%

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DELL HPQ IBM GTW

current price $28.67 $19.29 $86.20 $3.55

Market Cap. $74.3B $58.9B $145.7B $1.15B

P/E (ttm) 38.59 NA 26.14 NA

Sales (ttm) $33.7B $56.6B $80.3B $4.25B

Profit Margin (ttm) 5.90% -1.60% 7.20% -5.30%

Operating Margin (ttm) 7.80% -2.70% 7.40% -9.20%

ROE (ttm) 42.54% -4.65% 25.67% -18.61%

11/26/02

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Ratio Comparison

Valuation Ratios Company Industry SectorS P 500

P/E Ratio (TTM) 36.04 25.06 31.68 23.17

P/E High - Last 5 Yrs. 105.71 45.51 67.30 49.97

P/E Low - Last 5 Yrs. 21.29 17.99 19.96 17.40

Beta 1.89 1.54 1.75 1.00

Price to Sales (TTM) 2.07 1.32 3.76 2.63

Price to Book (MRQ) 14.02 6.44 3.76 4.18

Price to Tangible Book (MRQ) 14.02 6.84 4.66 7.05

Price to Cash Flow (TTM) 32.28 22.86 21.15 15.80

Price to Free Cash Flow (TTM) 20.95 14.68 21.35 26.88

% Owned Institutions 55.30 50.12 46.01 61.40

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Ratio Comparison ( Cont. )

Growth Rates(%) Company Industry Sector S&P 500

Sales (MRQ) vs Qtr. 1 Yr. Ago 11.14 9.74 6.53 3.74

Sales (TTM) vs TTM 1 Yr. Ago -1.61 -5.55 -2.45 1.58

Sales - 5 Yr. Growth Rate 32.06 11.91 19.25 11.33

EPS (MRQ) vs Qtr. 1 Yr. Ago NM -73.69 10.50 11.88

EPS (TTM) vs TTM 1 Yr. Ago 29.38 -8.66 -14.33 4.20

EPS - 5 Yr. Growth Rate 21.87 8.18 10.32 8.71

Capital Spending - 5 Yr. Growth Rate 21.59 5.90 15.54 10.28

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Ratio Comparison

Financial Strength Company Industry Sector S&P 500

Quick Ratio (MRQ) 0.83 0.97 2.32 1.09

Current Ratio (MRQ) 1.03 1.27 2.83 1.61

LT Debt to Equity (MRQ) 0.11 0.41 0.25 0.74

Total Debt to Equity (MRQ) 0.11 0.62 0.33 1.02

Interest Coverage (TTM) NM 21.47 8.87 9.52

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Ratio Comparison ( Cont. )

Profitability Ratios (%) Company Industry Sector S&P 500

Gross Margin (TTM) 17.58 28.86 50.56 47.7

Gross Margin - 5 Yr. Avg. 20.62 30.51 52.97 48.87

EBITD Margin (TTM) 8.18 8.31 18.16 21.12

EBITD - 5 Yr. Avg. 9.64 12.79 22.78 22.15

Operating Margin (TTM) 7.5 4.72 11.82 17.65

Operating Margin - 5 Yr. Avg. 8.99 9.04 16.96 18.19

Pre-Tax Margin (TTM) 8.09 6.02 12.31 14.93

Pre-Tax Margin - 5 Yr. Avg. 9.56 10.04 20 17.06

Net Profit Margin (TTM) 5.75 4.11 6.88 10.57

Net Profit Margin - 5 Yr. Avg. 6.65 6.95 12.44 11.23

Effective Tax Rate (TTM) 28.92 29.06 31.56 33.34

Effective Tax Rate - 5 Yr. Avg. 30.2 29.57 33.59 35.79

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Ratio Comparison

Management Effectiveness (%) Company Industry Sector S&P 500

Return On Assets (TTM) 13.69 6.27 3.9 6.36

Return On Assets - 5 Yr. Avg. 19.46 11.13 10.03 8.05

Return On Investment (TTM) 30.46 12.62 6.38 10.11

Return On Investment - 5 Yr. Avg. 42.98 22.05 15.26 12.85

Return On Equity (TTM) 39.19 21.32 8.77 18.06

Return On Equity - 5 Yr. Avg. 55.9 35.77 20.41 21.86

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Porters Five Forces & Analysis

Threat of New Entrants: MODERATE

Low capital investment for independentstores

Low product differentiation

Brand name may be a barrier to entry Low economies of scale

No legal or governmental barriers

Decreasing profitability shows thatthere is a threat of new entrants

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Porters Five Forces & Analysis (cont.):

Rivalry: HIGH

High concentration Price War: Low Margin

Decreasing profitability

Low differentiationHowever, in the midst of sever

competition, Dell can still gain marketshare from other competitors. Thatproves Dells business strategies have

been successful.

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Bargaining Power of Buyer: High

Highly price sensitiveReliability and customer service become

important factors.

Dells products are very reliable andcustomer service is outstanding. Thesetwo factors help Dell to create certainbrand royalty. But thats given the fact

that the Company set the prices verylow. If the prices are raised too high,customers will not hesitate to switch.

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Bargaining Power of Suppliers: HIGH

Large number of suppliers forcomponents like hardware, keyboards,etc.

But two major inputs are monopolized Microsoft standard for all PCs

Intel standard for most PCs

High switching costs

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Stock Performance (cont.):

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News and the Latest Developments:

- Dell Computer Corp. To Unveil Smaller

Servers For Companies:The Wall Street Journal reported that DellComputer Corp. is expected to enter the marketfor ultrasmall server computers, unveiling aradical design that shrinks the size, power

consumption and cost of running businesscomputers. According to the Journal, Dell's1655MC computer is a "blade" server thatpackages processor, memory and disk storage

in book-size blocks that slide into a sharedchassis like blades on a pen knife.

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News and the Latest Developments (cont.):

Dell Computer Corp. Issues Q4 Guidance In-

Line With Analysts' Estimates:Dell Computer Corp. announced that its fourthquarter shipments could increase 10% from thethird quarter, or 23% from the year-ago period.Fourth quarter 2002 revenues are expected to

be up about 20% year-over-year, to nearly $9.7billion. With anticipated further improvement inoperating margins, the Company expects fourthquarter earnings per share of 23 cents, which is35% higher than last year. Wall Street analysts

on average are expecting the Company to earn23 cents per share on revenues of $9.69 billionin the fourth quarter, according to Multex.

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Dell Computer Corp. Offers Customers New

3.06GHz Processor Option:Dell Computer Corp. announced theavailability of the Intel Pentium 4 processorrunning at 3.06GHz on select Dimension andOptiPlex desktop computers, and Dell Precision

workstations. Customers can purchase systemswith a 3.06GHz processor utilizing Hyper-Threading (HT) Technology, which can enablecustomers to do more tasks in less time. Thetechnology makes more efficient use of

processing power by utilizing moments of idlecycles that allow for the processor to work onmore than one request simultaneously.

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Dell Computer Corp. Will Enter The

PDA Market:Dow Jones reported that Dell ComputerCorp. will release its first personal digitalassistant (PDA) products in the U.S. in

late November. According to the Journal,Dell will release two PDA products intime for Christmas, with the officiallaunch date Nov. 18.

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DCF and DuPont method

Go to the excel spreadsheet

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Valuation: P/E Approach

Assume 17% growth in sales

Annual rate of return is calculated using costbase = $41.75. Trade date was on 12/10/99.

Case 1: use current P/E = 37

Price in 2/1/2008: $69.46, annual return =6.49%

Case 2: use S&P 500 P/E = 28

Price in 2/1/2008: $54.02, annual return =3.23%

Case 3: use P/E = 20

Price in 2/1/2008: $38.59, annual return = -0.97%

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Valuation: Growth in Sales Terminal Growth Rate = 4%

Case 1: Analyst consensus growth rate = 17%Fair Value = $20.11 ~ $24.58

Case 2: Dells 5 yrs growth rate = 32.06%

Fair Value = $51.16 ~ $62.53

Case 3: growth rate = 10%

Fair Value = $10.20 ~ $12.47

Case 4: growth rate = 20%:

Fair Value = $25.14 ~ $30.73

Documents

DELL2002-12.ppt