DELL Share Gains Over Profits
Dell, Inc. (DELL) posted better-than-expected revenue for the second quarter of fiscal 2009 as aggressive pricing that helped drive unit sales. On a positive note, it does appear that price cuts were successful in taking some share, and operating expense reductions are ahead of expectations.
On August 28, Dell released results for the second quarter of fiscal year 2009, ended August 1, 2008. Revenue for the quarter was $16,434 million in the quarter, ahead of our $15,958 million estimate and 11.2% above the $14,776 million reported in the second quarter of fiscal 2008.
However, we are concerned that Dell is returning to a period of strong share gains over profits. We therefore maintain a Hold rating on DELL shares and cut our six-month price target to $20.50.
At the beginning of fiscal year 2008, Dell announced five growth priorities, which include; Consumer, Emerging Countries, Enterprise, Small and Medium Businesses (SMBs), and Notebooks. Dell has struggled in the consumer market, losing share to Hewlett-Packard (HPQ) over the past few years.
The company is designing new, innovative products with faster development cycles and competitive features. Dell believes that personalization and mobility will be the drivers for the consumer market, which IDC expects to grow to 148 million units in 2011 from the 90 million in 2006, a CAGR of 11%. To address the distribution problem, Dell entered the retail channel in order to better serve the consumer market. We believe this will help the company.
The Andersons No Longer a Secret
The Andersons, Inc. (ANDE) reported second quarter 2008 EPS of $2.48, above our estimate of $2.36 and up 77.1% year-over-year, primarily due to the contribution from the Grain & Ethanol and the Plant Nutrient Groups. Revenue was up a strong 73.6% year-over-year.
Over the long-term, the company plans to capitalize on the ethanol boom by selling ethanol producers its general management, marketing and risk management services. We expect the Plant Nutrient group to post strong growth going forward.
Nonetheless, the Retail Group is facing tough competition from large-scale competitors and in the Rail Group, utilization rate of the fleet and high maintenance costs in the lease business remain a concern.
At the current price of $41.74, ANDE stock trades at a P/E multiple of 8.3x our 2008 EPS estimate of $5.04. This is at a discount to the industry median multiple. Even though the company operates in five different businesses grain operations, railroad car, superstore retailing, agricultural nutrients and inputs and turf and ornamental plant fertilizers, we believe its Grain & Ethanol unit to be the company s primary growth driver.
This is due to our belief that this group will comprise 60% of total profits by the year 2010. Also, we expect the Plant Nutrient group to post strong growth going forward. However, currently we do not expect a significant expansion in P/E multiple due to ongoing weakness in the Retail and Rail groups. Applying a P/E multiple of about 8.5x our 2008 earnings estimate of $5.04 per share, we derive a target price of $43.00 and maintain a Hold rating on ANDE shares.
Sunoco L.P. Positives Reflected
We are maintaining our Hold recommendation on Sunoco Logistics Partners, L.P. (SXL) units following its strong second-quarter results, which benefited from solid contribution from its Western Pipeline System.
Importantly, the partnership increased its quarterly distribution by 11.7% year-over-year to the annualized rate of $3.74 per unit. While the partnership no doubt offers strong distribution-growth prospects, we believe that to be already reflected in its premium valuation relative to the peer group, thereby offering limited upside from current levels.
