Dell-Case Study in Corporate Self-destruction

All companies go through various cycles of growth at various speeds. This is also true in the way in which the stock market embraces them, and then spits them out, and throws them away. The market darling at the moment going through such a cycle is Dell Computer. This company is now in the process of switching places with also-ran Hewlett-Packard which was out of favor for years.

Since Dell’s inception in the 1984 and later its public offering, the company could do no wrong. Its sales are now approaching $60 billion dollars and its number 25 on the Fortune 500. They have utilized a direct model approach to building PC’s since the beginning. This eliminated the middleman, and allowed you the customer to build your computer to order. In other words, you got a custom made machine. This is also the only company I have encountered with a negative cash conversion cycle. They get your money before they owe it to the vendors who sell them the parts. It’s literally unheard of in business.

How things can change in the blink of an eye

This company once had the finest customer service in the business. The whole deal was moved to India with disastrous effects. I have encountered no one, that’s right no one who has a decent word to say about Dell’s customer service. I have had several encounters myself with Dell’s version of customer service. Let me illustrate one. I had to spend a ridiculous period of time explaining my address. It’s simple I live in Westport, CT., but if you have ever tried to send a package to Europe, the addresses work differently. I can’t imagine, how they do addresses in Bangalore, India where these call centers are.

You can not expect biased Wall Street to tell you the truth about Dell. The investment banking commissions on this company are huge. What’s it worth. This is simple. The peers are outperforming Dell and the peers are selling at 15 times earnings. Dell only deserves a premium to the peers because of its past illustrious history. If you give Dell a 17 PE multiple, and you believe the $1.12 number for fiscal 08, we have a stock trading under $20 and maybe lower, awaiting good news. If you give Dell a peer type price earnings ratio, it’s 15 times a $1.12 and that gives you a $17 stock, either way, it’s not pretty. Keep in mind that institutions don’t like to explain stupid investments to the people that give them the money to manage. If Dell is still in the doldrums at year-end, the institutions will bail big, rather than explain it. Dell will become the ultimate year-end tax loss selling candidate, and we don’t see the turnaround in sight yet.

Goodbye and good luck

Richard Stoyeck

August 18, 2006

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