(By Balachander) At least four brokerages reduced their price targets on shares of Dell Inc. (NASDAQ:DELL) after the PC maker posted lower-than-forecast quarterly revenue amid eroding PC sales and a drop in gross margins and the company offered a weak forecast.
The Round Rock, Texas-based company "modified" its earnings per share (EPS) guidance to at least $1.70 for the year ending January 2013 on a non-GAAP basis. In February, Dell had expected EPS to exceed $2.13 it reported for fiscal 2012. Wall Street analysts currently expect EPS of $1.91.
Dell forecasts revenue decline of 2 percent to 5 percent for the third quarter on a sequential basis. Its second-quarter revenue decreased 8 percent, more than consensus estimate of a drop of 6.40 percent, with Consumer revenue down 22 percent.
The stock, which has been trading in the 52-week range between $11.39 and $18.36, tumbled 7.13 percent to trade at $11.46 at 11:36 am ET on Wednesday.
The company has been losing business to rival Hewlett-Packard Co. (NYSE:HPQ) and Lenovo despite improvements in the global PC shipments. Dell continues to shift away from lower end PC's and towards the high-margin software, security and cloud computing businesses.
Sales of desktop PCs and mobility products dropped 9 percent and 19 percent, respectively.
"While some of the headwinds are cyclical in nature (Pause into Win8), we believe the larger and a more secular issue for DELL is faster than anticipated declines in PC's due to growth of AAPL products and increased competition from Lenovo," RBC Capital Markets analyst Amit Daryanani wrote. "Neither one of those dynamics are likely to ease up in the near term."
Daryanani, who has a "Sector Perform" rating on the stock, lowered price target to $14 from $15.
"Moreover, DELL's Client (PC) business declined by a steep 14 percent Y/Y, and we think that the key reason here is strong Asian competition (Acer, Lenovo, and Acer) in addition to a weaker macroeconomic environment and softer consumer," FBN Securities analyst Shebly Seyrafi wrote in a note.
Region wise, Asia-Pacific and Japan revenue fell 12 percent. EMEA revenue dropped 7 percent, and Americas was down 6 percent.
Seyrafi, who reduced price target to $13 from $14, thinks the weakness in Asia-Pacific is material share loss to Asian PC companies. DELL continues to be negatively impacted by tablet displacement and by customer pause in front of Windows 8 (Oct. 26), said Seyrafi, who retained his "Sector Perform" rating on the stock.
UBS Securities analyst Steven Milunovich wrote that Dell is trying to stick to the high end, but there may not be much of a high end in PCs anymore as tablets eat into laptops. He trimmed price target to $12.00 from $12.50.
"The decrease was attributed to a softer macro, a channel drawdown due to Windows 8 anticipation, and competitive pressures in the PC market - especially in emerging markets, where ASP pressures were notably more aggressive," wrote Ananda Baruah, an analyst at Brean Murray, Carret & Co (BMC).
Baruah, however, is comforted by the continued growth in the Enterprise Solutions and Services (ESS) segment, as Servers and Networking delivered a robust 14 percent Y/Y growth rate – mostly due to x86 adoption. The analyst, who trimmed price target on the stock to $14 from $15, has a "Buy" rating.
Baruah believes the strength in the ESS segment can continue to offset some of the downward pressure emanating from the PC market.
HP is scheduled to report its quarterly results after the market closes. Analysts, on average, expect the PC maker to earn $0.98 a share on revenue of $30.1 billion for the third quarter.