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Dell, Inc. Q4 Earnings Preview: M&A To Hog Limelight Than Financials

 February 14, 2013 10:33 AM
 


(By Mani) PC maker Dell, Inc. (NASDAQ: DELL), which has agreed to be taken private in a $24.4 billion deal, is expected to report its fourth-quarter financial results on Feb.19. But, more than the earnings, investors could be focused on the takeover row, which erupted after several shareholders felt that the $13.65 price is too low and undervalues Dell.

Wall Street expects Texas-based Dell to earn 39 cents a share, according to analysts polled by Thomson Reuters. The consensus earnings estimate represents a decline of 23.5 percent from last year, when it earned 51 cents a share.

Dell's earnings are likely to miss estimates given the market share losses in its PC business. In the past four quarters, Dell's earnings came in below Street estimates thrice.

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The company's profit, on average, fell 29 percent in the last four quarters. Profit for the third quarter fell 47 percent, making it one of the hardest-hit quarters of Dell.

Quarterly sales of Dell, the world's third largest PC maker after Hewlett-Packard Company (NYSE: HPQ) and China's Lenovo Group, is expected to fall 11.9 percent to $14.13 billion from $16.03 billion last year. Dell expects fourth quarter revenue to grow 2 to 5 percent, implying revenue of $13.99 billion to $14.41 billion.

Declining PC sales should continue to weigh on Dell's results as availability of compelling low-cost tablets caused PC users to shift consumption to tablets rather than replacing older PCs. The company's desktop PC revenue for the third quarter fell 8 percent to $3.13 billion while its mobility revenue, which includes laptops, decreased 26 percent to $3.52 billion.

[Related -Drama Aside, Dell Is A Quality Tech Stock]

Dell recorded a revenue drop of 10.7 percent in the third quarter to $15.37 billion while the metric declined 7.5 percent in the second quarter and 4 percent in the first quarter.

Global PC shipments fell nearly 5 percent in the final three months of 2012 to 90.3 million units, indicating likely structural changes to the market rather than weak demand, according to market research firm Gartner.

In the U.S., PC shipments dropped 2.1 percent to 17.5 million units. Among the top five PC vendors, only Lenovo registered 8.2 percent growth year-on-year. Dell shipments fell around 21 percent.

Since the PC business is bleeding losses, investors would look at the performance of other segments such as software, server and storage. Dell's software and peripherals revenue for the third quarter fell 11 percent while server and networking revenue rose 11 percent. Storage revenue fell 16 percent.

For the full year, analysts expect Dell to report earnings of $1.71 a share while the company sees adjusted earnings of at least $1.70 a share. Annual revenue is estimated to decline 8.6 percent to $56.75 billion.

But, as we said before, the M&A topic will hog the limelight during the conference call, where investors and analysts alike will question Dell over the takeover price if they don't find any worthwhile comments in the results.

Already large shareholders such as T. Rowe Price Group Inc. (NASDAQ:TROW) and Southeastern Asset Management, who together own more than 10 percent of the stock, have decided to vote against the deal. Pzena Investment Management, who has about 1 percent stake, also gave a thumbs down to the offer, which was just 8 times the company's estimated 2013 earnings.

"Our multiple iterations of valuing Dell's stock all arrive at a single conclusion: the current $13.65 LBO offer is a material discount to Dell's inherent CF value. In fact, a blended average of our 6 different valuation methods suggests Dell's shares could be worth >$18/share on a cash flow basis," Brean Capital analyst Ananda Baruah wrote in a note to clients.

iStock also noted that the deal price could stretch to $14.25, a price that would gain adequate shareholder approval.

If Dell delivers an upside surprise to its earnings and sales, and shows improvement in PC sales, then the shareholders are likely to put more pressure on Dell to boost offer price.

Shares of Dell, which trades at 7.8 times its consensus 2013 earnings estimate, gained 29 percent year-to-date, mainly on the buyout offer. They have been trading between $8.69 and $18.36 during the past 52-weeks.
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