Dell, Inc. [NDQ:DELL]
Feb. 6, 2009 close: $9.46
52-week range: $8.72 (Nov. 21, 2008) - $26.04 (Aug. 8, 2008)
Dell is a world leader in computer systems and services with FY 2008 revenues of over $62 billion. Despite the poor economy, last fiscal year’s
earnings (FY ended Jan. 31, 2009) are expected to have been their second highest ever at $1.35/share. That’s up 3.05% from FY 2007.
Assuming the world stays in recession, the current consensus estimate for the year just begun is now $1.22 /share – not too bad considering the punk environment. With Dell’s shares now at $9.46, the forward P/E is just 7.75x – well under any previous multiple for these shares over the past 20 years.
Dell’s balance sheet is solid. They held over $8.57 billion in cash against total debt of just $2.117 billion as of October 31, 2008. Only $266 million in principal comes due in the next five years and the long-term debt was issued at very favorable rates averaging just 5.4%. There is no defined benefit plan and no preferred stock. Value Line gives DELL an ‘A’ rating for financial strength.
Dell looks to be a definite survivor for the long haul and should benefit hugely from pent up demand once the economy begins to show improvement.
Here are the company’s per share numbers from the past eight years (as reported by Value Line). FY 2008 figures include estimates for Q4 due to be reported later this month.
FY …..… Sales …... C/F .….. EPS ….... B.V. ….. Avg. P/E
2001 … 11.98 ….. 0.78 ….. 0.65 ….. 1.80 ……. 38.9x
2002 … 13.73 ….. 0.90 ….. 0.80 ….. 1.89 ……. 33.3x
2003 … 16.21 ….. 1.14 ….. 1.01 ….. 2.46 ……. 31.6x
2004 … 19.80 ….. 1.47 ….. 1.29 ….. 2.61 ……. 28.0x
2005 … 23.99 ….. 1.81 ….. 1.56 ….. 1.77 ……. 23.1x
2006 … 25.80 ….. 1.37 ….. 1.14 ….. 1.99 ……. 22.3x
2007 … 29.68 ….. 1.73 ….. 1.31 ….. 1.81 ……. 19.7x
2008 … 32.30 ….. 1.80 ….. 1.35 ….. 2.40 ……. 12.9x
Dell has been retiring shares over the past eight years. Shares outstanding decreased from 2.602 billion in 2001 to about 1.94 billion currently.
I’m taking a very conservative view of the next couple of years’ earnings power and the multiple that these shares will command. Even 10 times the $1.22 estimate for FY 2009 would bring a rebound to a goal price of $12.20 by year end. That $2.74 price improvement would translate to a 12-month gain of + 28.9% from last week’s closing quote.
Outright purchase of these shares looks like a good play.
For those of you that are option savvy, here’s what I think is an even better one:
……………………………..................………… Cash Outflow ….........….. Cash Intake
Buy 1000 DELL @ $9.46 ……...........………. $9,460
Sell 10 Jan. 2010 $10 calls @ $1.75 ….................……………………….. $1,750
Sell 10 Jan. 2010 $10 puts @ $2.20 …................……………………….. $2,200
Net Cash Out-of-Pocket …………….................…………… $5,510
If DELL shares go up to $10 or higher by expiration date (Jan. 15, 2010)
- a rise of 5.7% or greater:
Your $10 calls will be exercised.
You will sell your stock for $10,000 cash.
Your $10 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $10,000 for your original $5,510 cash outlay.
That’s a gain of $4,490 or + 81% on shares that only needed to rise by 5.7% from the trade’s inception date.
What’s the risk?
If DELL shares are below $10 on expiration date in Jan. 2010:
Your $10 calls will expire worthless.
Your $10 puts will be exercised.
You will be forced to buy an additional 1000 shares for $10,000 more than your original outlay of cash.
You will now own 2000 shares of DELL for a total net outlay of $15,510.
That’s an average net cost of $7.76 /share.
How did I arrive at that?
The break-even price on the original 1000 shares was the purchase price of $9.46 less the $1.75 /share call premium = $7.71 /share.
The break-even price on the puts is the $10 strike price less the $2.20 /share put premium = $7.80 /share.
DELL shares could drop by up to 17.9% from last week’s price without you suffering a loss. That would represent just 6.4x current year estimates.
DELL shares have not traded as low as your $7.76 break-even price on a split-adjusted basis since 1997 – a year when EPS came in at $0.32 versus this year’s expected $1.22 /share.
If you want to have more upside and are willing to go out two years here’s my play for 2011:
…………………………………..............……… Cash Outflow …............….. Cash Intake
Buy 1000 DELL @ $9.46 ……….......………. $9,460
Sell 10 Jan. 2011 $12.50 calls @ $1.80 …….................………………….. $1,800
Sell 10 Jan. 2010 $12.50 puts @ $4.60 ……................………………….. $4,600
Net Cash Out-of-Pocket ………………..............…………… $3,060
If DELL shares go up to $12.50 or higher by expiration date (Jan. 2011)
- a rise from today’s price of 32.2% or greater:
Your $12.50 calls will be exercised.
You will sell your stock for $12,500 cash.
Your $12.50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $12,500 for your original $3,060 cash outlay.
That’s a gain of $9,440 or + 308% on shares that only needed to rise by 32.2% from the trade’s inception date.
What’s the risk?
If DELL shares are below $12.50 on expiration date in Jan. 2010:
Your $12.50 calls will expire worthless.
Your $12.50 puts will be exercised.
You will be forced to buy an additional 1000 shares for $12,500 more than your original outlay of cash.
You will now own 2000 shares of DELL for a total net outlay of $15,560.
That’s an average net cost of $7.78 /share.
How did I arrive at that?
The break-even price on the original 1000 shares was the purchase price of $9.46 less the $1.80 /share call premium = $7.66 /share.
The break-even price on the puts is the $12.50 strike price less the $4.60 /share put premium = $7.90 /share.
DELL shares could drop by up to 17.8% from last week’s price without you suffering a loss. That would represent just 6.4x current year estimates.
DELL shares have not traded as low as your $7.78 break-even price on a split-adjusted basis since 1997 – a year when EPS came in at $0.32 versus this year’s expected $1.22 /share.
Disclosure: Author is long DELL shares and short DELL options.
Feb. 6, 2009 close: $9.46
52-week range: $8.72 (Nov. 21, 2008) - $26.04 (Aug. 8, 2008)
Dell is a world leader in computer systems and services with FY 2008 revenues of over $62 billion. Despite the poor economy, last fiscal year’s
earnings (FY ended Jan. 31, 2009) are expected to have been their second highest ever at $1.35/share. That’s up 3.05% from FY 2007.
Assuming the world stays in recession, the current consensus estimate for the year just begun is now $1.22 /share – not too bad considering the punk environment. With Dell’s shares now at $9.46, the forward P/E is just 7.75x – well under any previous multiple for these shares over the past 20 years.
Dell’s balance sheet is solid. They held over $8.57 billion in cash against total debt of just $2.117 billion as of October 31, 2008. Only $266 million in principal comes due in the next five years and the long-term debt was issued at very favorable rates averaging just 5.4%. There is no defined benefit plan and no preferred stock. Value Line gives DELL an ‘A’ rating for financial strength.
Dell looks to be a definite survivor for the long haul and should benefit hugely from pent up demand once the economy begins to show improvement.
Here are the company’s per share numbers from the past eight years (as reported by Value Line). FY 2008 figures include estimates for Q4 due to be reported later this month.
FY …..… Sales …... C/F .….. EPS ….... B.V. ….. Avg. P/E
2001 … 11.98 ….. 0.78 ….. 0.65 ….. 1.80 ……. 38.9x
2002 … 13.73 ….. 0.90 ….. 0.80 ….. 1.89 ……. 33.3x
2003 … 16.21 ….. 1.14 ….. 1.01 ….. 2.46 ……. 31.6x
2004 … 19.80 ….. 1.47 ….. 1.29 ….. 2.61 ……. 28.0x
2005 … 23.99 ….. 1.81 ….. 1.56 ….. 1.77 ……. 23.1x
2006 … 25.80 ….. 1.37 ….. 1.14 ….. 1.99 ……. 22.3x
2007 … 29.68 ….. 1.73 ….. 1.31 ….. 1.81 ……. 19.7x
2008 … 32.30 ….. 1.80 ….. 1.35 ….. 2.40 ……. 12.9x
Dell has been retiring shares over the past eight years. Shares outstanding decreased from 2.602 billion in 2001 to about 1.94 billion currently.
I’m taking a very conservative view of the next couple of years’ earnings power and the multiple that these shares will command. Even 10 times the $1.22 estimate for FY 2009 would bring a rebound to a goal price of $12.20 by year end. That $2.74 price improvement would translate to a 12-month gain of + 28.9% from last week’s closing quote.
Outright purchase of these shares looks like a good play.
For those of you that are option savvy, here’s what I think is an even better one:
……………………………..................………… Cash Outflow ….........….. Cash Intake
Buy 1000 DELL @ $9.46 ……...........………. $9,460
Sell 10 Jan. 2010 $10 calls @ $1.75 ….................……………………….. $1,750
Sell 10 Jan. 2010 $10 puts @ $2.20 …................……………………….. $2,200
Net Cash Out-of-Pocket …………….................…………… $5,510
If DELL shares go up to $10 or higher by expiration date (Jan. 15, 2010)
- a rise of 5.7% or greater:
Your $10 calls will be exercised.
You will sell your stock for $10,000 cash.
Your $10 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $10,000 for your original $5,510 cash outlay.
That’s a gain of $4,490 or + 81% on shares that only needed to rise by 5.7% from the trade’s inception date.
What’s the risk?
If DELL shares are below $10 on expiration date in Jan. 2010:
Your $10 calls will expire worthless.
Your $10 puts will be exercised.
You will be forced to buy an additional 1000 shares for $10,000 more than your original outlay of cash.
You will now own 2000 shares of DELL for a total net outlay of $15,510.
That’s an average net cost of $7.76 /share.
How did I arrive at that?
The break-even price on the original 1000 shares was the purchase price of $9.46 less the $1.75 /share call premium = $7.71 /share.
The break-even price on the puts is the $10 strike price less the $2.20 /share put premium = $7.80 /share.
DELL shares could drop by up to 17.9% from last week’s price without you suffering a loss. That would represent just 6.4x current year estimates.
DELL shares have not traded as low as your $7.76 break-even price on a split-adjusted basis since 1997 – a year when EPS came in at $0.32 versus this year’s expected $1.22 /share.
If you want to have more upside and are willing to go out two years here’s my play for 2011:
…………………………………..............……… Cash Outflow …............….. Cash Intake
Buy 1000 DELL @ $9.46 ……….......………. $9,460
Sell 10 Jan. 2011 $12.50 calls @ $1.80 …….................………………….. $1,800
Sell 10 Jan. 2010 $12.50 puts @ $4.60 ……................………………….. $4,600
Net Cash Out-of-Pocket ………………..............…………… $3,060
If DELL shares go up to $12.50 or higher by expiration date (Jan. 2011)
- a rise from today’s price of 32.2% or greater:
Your $12.50 calls will be exercised.
You will sell your stock for $12,500 cash.
Your $12.50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $12,500 for your original $3,060 cash outlay.
That’s a gain of $9,440 or + 308% on shares that only needed to rise by 32.2% from the trade’s inception date.
What’s the risk?
If DELL shares are below $12.50 on expiration date in Jan. 2010:
Your $12.50 calls will expire worthless.
Your $12.50 puts will be exercised.
You will be forced to buy an additional 1000 shares for $12,500 more than your original outlay of cash.
You will now own 2000 shares of DELL for a total net outlay of $15,560.
That’s an average net cost of $7.78 /share.
How did I arrive at that?
The break-even price on the original 1000 shares was the purchase price of $9.46 less the $1.80 /share call premium = $7.66 /share.
The break-even price on the puts is the $12.50 strike price less the $4.60 /share put premium = $7.90 /share.
DELL shares could drop by up to 17.8% from last week’s price without you suffering a loss. That would represent just 6.4x current year estimates.
DELL shares have not traded as low as your $7.78 break-even price on a split-adjusted basis since 1997 – a year when EPS came in at $0.32 versus this year’s expected $1.22 /share.
Disclosure: Author is long DELL shares and short DELL options.
