In a joint interview between GuruFocus and Adviser Perspective, G. Stanley Cates of Southeastern Asset Management laid out the case for their position in Dell Computers ( DELL). Here is an excerpt of what he had to say:
“Right now, Dell has over $4 billion in free cash flow - net, after tax, and after all CAPEX. This will be the third year the company has generated that. Dell has $23.5 billion of total assets ex cash, and therefore an operating ROA of 17%. Of the $23.5B, $6B is goodwill and intangibles, making the free cash return on tangible assets 23%.
The other interesting thing is that you actually just called it “Dell Computers,” which highlights why it is cheap. People still view it as desktop and notebooks, even though those are dying a slow death. Those represent probably a fourth of corporate value and a third of earnings.
The good segments – storage, servers, services, and software – account for the majority of value and an overwhelming percentage of future growth. Dell has its basis in computers, because computers created the free cash, which led to the 20,000-person distribution network, which is why they can now buy a storage company, widely distribute its products, and take revenues up in multiples the way they did with EqualLogic.
Dell has over $6.00 of net cash, including approximately $1.50 in finance receivables, and a stock price around $15. I mentioned the $4 billion of free cash flow, and it will be actually more than that. With a little under 2 billion shares outstanding, Dell will generate over $2 per share of free cash flow. You are paying approximately $9 per share ($15 price - $6 cash) for the operating business – basically a 4.5 P/E on real cash earnings, if you will, for a return-on-assets in the high teens or return-on-tangible assets in the 20s.
That is why we are there. It is cheap because of this perception of what they do versus what they actually do.”
That is a pretty compelling argument from Mr. Cates. Let’s take a closer look at some of the figures presented above, as well as other data from recent quarterly releases and conference calls.
In Fiscal Year 2011, revenue increased $8.6 billion to $61.494 billion – the largest single-year dollar increase in the company’s history. Operating income increased 58% for the year to $3.43 billion, along with mid-80% increases in GAAP Net income ($2.635B) and GAAP EPS ($1.35). From looking at the balance sheet (Oct 2010), we see that the company has current cash & equivalents of $13.38B, compared to long term debt of $5.168B; this works out to net cash of $8.632B on the books. When taken on a per share basis (1.93 billion shares out), I arrive at $4.47/share in net cash (does not include $3.588B in financing receivables, which accounts for shortfall in estimates). When backed out from the current stock price of $14.65/share, my estimates suggest a price of $10.18/share for $1.35 of earnings, for an earnings yield of 13.26%. Based on the company fundamentals and the current economic environment, an E/P above 13% looks very attractive.
As noted by Mr. Cates, the “good segments” are performing well. For the most recent quarter, server and storage revenue were up double digits in both the Public and Small & Medium Business units. As noted by CEO Michael Dell, “We remain focused on developing and acquiring new technologies and capabilities, and our IT solutions portfolio has never been stronger. Customers are now seeing Dell in a fresh light, and we’re heading into the new year with strength and optimism.”
As highlighted in the press release, the outlook for 2012 expects revenue growth of 5 to 9 percent, non-GAAP operating income growth of 6 to 12 percent, and continued strong execution on cash flow with cash flow from operations exceeding net income. Based on the current valuation and the opportunities in BRIC countries (21% revenue growth in Q4, 13% of company’s total revenues) and expanding high margin growth segments, DELL looks like a steal under $15/share.
“Right now, Dell has over $4 billion in free cash flow - net, after tax, and after all CAPEX. This will be the third year the company has generated that. Dell has $23.5 billion of total assets ex cash, and therefore an operating ROA of 17%. Of the $23.5B, $6B is goodwill and intangibles, making the free cash return on tangible assets 23%.
The other interesting thing is that you actually just called it “Dell Computers,” which highlights why it is cheap. People still view it as desktop and notebooks, even though those are dying a slow death. Those represent probably a fourth of corporate value and a third of earnings.
The good segments – storage, servers, services, and software – account for the majority of value and an overwhelming percentage of future growth. Dell has its basis in computers, because computers created the free cash, which led to the 20,000-person distribution network, which is why they can now buy a storage company, widely distribute its products, and take revenues up in multiples the way they did with EqualLogic.
Dell has over $6.00 of net cash, including approximately $1.50 in finance receivables, and a stock price around $15. I mentioned the $4 billion of free cash flow, and it will be actually more than that. With a little under 2 billion shares outstanding, Dell will generate over $2 per share of free cash flow. You are paying approximately $9 per share ($15 price - $6 cash) for the operating business – basically a 4.5 P/E on real cash earnings, if you will, for a return-on-assets in the high teens or return-on-tangible assets in the 20s.
That is why we are there. It is cheap because of this perception of what they do versus what they actually do.”
That is a pretty compelling argument from Mr. Cates. Let’s take a closer look at some of the figures presented above, as well as other data from recent quarterly releases and conference calls.
In Fiscal Year 2011, revenue increased $8.6 billion to $61.494 billion – the largest single-year dollar increase in the company’s history. Operating income increased 58% for the year to $3.43 billion, along with mid-80% increases in GAAP Net income ($2.635B) and GAAP EPS ($1.35). From looking at the balance sheet (Oct 2010), we see that the company has current cash & equivalents of $13.38B, compared to long term debt of $5.168B; this works out to net cash of $8.632B on the books. When taken on a per share basis (1.93 billion shares out), I arrive at $4.47/share in net cash (does not include $3.588B in financing receivables, which accounts for shortfall in estimates). When backed out from the current stock price of $14.65/share, my estimates suggest a price of $10.18/share for $1.35 of earnings, for an earnings yield of 13.26%. Based on the company fundamentals and the current economic environment, an E/P above 13% looks very attractive.
As noted by Mr. Cates, the “good segments” are performing well. For the most recent quarter, server and storage revenue were up double digits in both the Public and Small & Medium Business units. As noted by CEO Michael Dell, “We remain focused on developing and acquiring new technologies and capabilities, and our IT solutions portfolio has never been stronger. Customers are now seeing Dell in a fresh light, and we’re heading into the new year with strength and optimism.”
As highlighted in the press release, the outlook for 2012 expects revenue growth of 5 to 9 percent, non-GAAP operating income growth of 6 to 12 percent, and continued strong execution on cash flow with cash flow from operations exceeding net income. Based on the current valuation and the opportunities in BRIC countries (21% revenue growth in Q4, 13% of company’s total revenues) and expanding high margin growth segments, DELL looks like a steal under $15/share.
