Carl Icahn came out swinging on Tuesday in the latest round of the fight for control of Dell (NASDAQ:DELL). The billionaire activist investor believes that the Dell board is significantly undervaluing the company at $13.65 per share as it moves to take the company private. While the drama between Icahn and Dell has made financial headlines recently, is there any value in owning the underlying stock? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalysts for the Stock’s Movement
The battle between Icahn and Dell for control of the company has fueled much of the recent trading volume. While Dell’s quarterly results in May missed earnings projections, the stock has risen 32 percent since the beginning of the year. Clearly, the catalyst for this uptrend is not revenue growth, which has been less than satisfactory over the past year. Investors should expect the stock to approach $13.65 (Dell’s proposed buyout price) just before the July 18 meeting.
A = A-Level Management Does Not Run the Company
After retiring as CEO in 2004, Michael Dell returned to the company he built after declining sales growth and market share. Unfortunately, by the time Dell resumed his position as CEO, the company had missed out on several key trends in the industry — namely the rise of tablet PCs and cloud computing.
Since then, management has struggled with a reinvention process — shifting from end-user computing to higher-margin software and IT service operations. The company has tried to accomplish this transformation through acquisitions of IT companies. While Dell has experienced recent success with its new model — revenue from its Enterprise Services Group increased 9.8 percent over the past year — Dell may be too late to the party. It has lost first-mover advantage to competitors such as Hewlett-Packard (NYSE:HPQ) and IBM (NYSE:IBM).
T = Technicals on the Stock Chart are Mixed
Dell is currently trading at around $13.45, above both its 50-day and 200-day moving averages of $13.39 and $13.01, respectively. The stock, which began trending upward last November, seems to have plateaued between $13 and $14 a share. The share price has leveled off over the last few months as investors are waiting to see whether shareholders will vote for the Dell-Silver Lake proposal or the Icahn-Southeastern Asset Management proposal.
T = Trends Do Not Support the Industry in Which the Company Operates
Dell’s core business strategy, manufacturing and selling PCs and printers, is no longer sustainable in the current marketplace. A plethora of overseas competitors have put downward pressure on the price of personal computing hardware, and margins have almost disappeared. Additionally, the rise of smartphones and tablets has reduced demand for Dell’s PC offerings.
Dell has diversified its business operations in the last several years, acquiring several IT companies and focusing its efforts on becoming an end-to-end IT services provider. This diversification strategy has effectively reduced Dell’s end-user computing division to 55 percent of its overall revenue. Dell is still too reliant on its end-user computing business model — operating income in this division fell 65 percent over the past year.
Dell has made strides to reinvent itself as a software and IT services provider. Revenue from these operations has increased over the past year. The company has also made several key acquisitions to become a major player in the IT services industry. Dell’s financial health looks strong on its balance sheets — the company has almost $11 billion in cash and only $7.26 billion in debt. Its debt-to-equity ratio is 0.67, below average relative to the rest of the personal computer industry.
Unfortunately, more than half of Dell’s revenue still comes from end-user computing hardware sales — an industry that has seen eroding in profit margins and demand over the past few years. If Dell’s proposal to take the company private is chosen on July 18, it will do little to benefit shareholders who decide to establish long positions in the stock now.
Under Icahn’s proposal, Dell will remain a publicly traded company and shareholders will get an attractive $12 dividend. However, the share price is likely to drop severely if this takeover occurs. Right now, there is too much uncertainty surrounding Dell to justify an OUTPERFORM or ever WAIT AND SEE rating. For now, investors should STAY AWAY.
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