Dell’s lowered outlook gives investors pause | VailDaily.com
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Dell’s lowered outlook gives investors pause

DALLAS – So Dell Inc. isn’t immune to the vagaries of the personal computer business either.Long a leader whose low-cost model drove rivals crazy, Dell lowered its earnings guidance for its just-ended fiscal third quarter, citing costly failed computer parts and sluggish growth. The company’s goal of hitting $80 billion in annual sales within three to four years may be drifting out of reach.”This is not a company that’s on the ropes, but I think it’s struggling to maintain the growth targets it has set for itself,” said Cindy Shaw, an analyst for Moors & Cabot. The firm downgraded Dell’s stock to hold from buy.Dell’s shares tumbled 8.3 percent Tuesday, dropping $2.64 to $29.24 on the Nasdaq Stock Market. The stock fell below the previous 52-week low of $30.82.Dell still tops the industry with 18 percent of the personal computer market. But late Monday, the Round Rock, Texas-based company said it would take charges of $450 million, or 14 cents per share, related to restructuring and a defective computer component.Analyst Andrew Neff of Bear Stearns said the company seemed stymied by its size.”Dell is trying to reaccelerate growth, but its increasing size and multiple moving parts inhibit its ability to react,” Neff, who lowered Dell’s stock rating from outperform to peer perform, wrote in a report Tuesday.The bulk of the newly disclosed charge, $300 million, is to fix faulty capacitors on the motherboards of older OptiPlex business desktop PCs. A spokesman said Dell wasn’t recalling the machines but would replace the circuit boards on those that fail.The rest of the charge covers excess parts and severance payments to an undisclosed number of workers whose jobs were eliminated in consolidation moves.Spokesman Jess Blackburn would not say how many jobs were cut other than that they affected a “small percentage” of the company’s 55,000 workers, at its Texas headquarters as well as facilities in the United Kingdom and Asia.Blackburn said Dell would not comment beyond the press release it issued Monday announcing the earnings forecast. Full results are due Nov. 10.Excluding the charges, Dell said it would earn 39 cents a share in the revised estimate. Analysts surveyed by Thomson Financial had recently expected 40 cents.Dell added that sales would come in at about $13.9 billion, less than its previous forecast range of $14.1 billion to $14.5 billion and below analysts’ estimate of $14.3 billion.Dell had already missed Wall Street revenue forecasts by $300 million in the second quarter.At the time, Chief Executive Kevin Rollins blamed the shortcoming on U.S. consumers who stuck with cheap, low-end desktops and laptops instead of upgrading to more expensive models. He also acknowledged that Dell had been too aggressive in cutting prices.Seeking to expand from mass-market PCs to higher-end gear, where profit margins aren’t quite so low, Dell unveiled an upscale line of desktops and notebooks with prices ranging from $1,000 to $6,000 in September.Chuck Jones, an analyst with Atlantic Trust Stein Roe, said Dell hasn’t kept up in high-growth overseas markets such as China. The largest slice of Dell’s revenue in the second quarter came from the United States and the Americas at 66 percent. Europe contributed 21 percent and Asia-Pacific 12 percent.Jones said Dell’s patented direct-sales model may be partly to blame. It works in countries where many people already own computers and feel comfortable ordering online, but “in more developing countries, there’s still a touch and feel aspect to buying things,” he said.Shaw said Dell executives seemed slow to realize that aggressive price-cutting wasn’t driving additional sales and loath to change tactics. She also said Dell’s competitive position in server sales seemed to be weakening, partly because rival Hewlett-Packard Co. had narrowed a price gap over the past two years.”It just seems like they had a formula that worked for them for a long time,” Shaw said. “They need to adapt their formula for the environment.”


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