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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 computer is now in the process of switching places with also-ran Hewlett-Packard which was out of favor for years.
Since Dellís inception in the 1984 and later its public offering, the company could do no wrong. Its sales are now approaching billion dollars and its number 25 on the Fortune 500. They have utilized a direct model approach to building PCís 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. Itís 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, thatís right no one who has a decent word to say about Dellís customer service. I have had several encounters myself with Dellís version of customer service. Let me illustrate one. I had to spend a ridiculous period of time explaining my address. Itís simple I live in Westport, CT., but if you have ever tried to send a package to Europe, the addresses work differently. I canít imagine, how they do addresses in Bangalore, India where these call centers are.
If a person has no feel for your culture and the way you conduct your life by being immersed in that culture, itís comes right through on the telephone, and thatís Dellís problem in India. A company replaces thousands of Americans with foreigners, and then thinks itís going to be okay. What Dell doesnít realize is that people vote with their feet, and they are now voting for Hewlett Packard, and other Dell competitors.
Exploding computers-Fires on Planes
Dellís recall of several million computers because of exploding batteries illustrates how management has lost touch with reality. Years ago, Johnson and Johnson had a public relations nightmare over the tampering of several shipments of Tylenol. How JNJ handled the PR from this scandal is a showcase example that is studied daily in colleges across the country. Dell did not confront their exploding batteries problem directly. They dodged, they hemmed, and they yawed. This resulted in a tremendous loss of consumer confidence in the company that will take years to rebuild, if in fact they can rebuild it.
Whoís driving the bus?
Dell has now announced a 41% drop in their fiscal second-quarter profit, and now there are accounting issues facing the company. In their announcement Dell attributed the earnings decline to overly aggressive pricing. This is utter nonsense. The company should be more forthcoming about their problems. The aggressive pricing that they are alluding to is not reflected in the numbers I see. I have looked at both their desktop and notebook average selling prices for the last two quarters. They were flat on a sequential basis, so what are they talking about? Server ASPís were even up on a sequential basis. The folks at Dell have to come up with a better story. On a year to year basis there are price declines in the desktop, notebook, and server ASP segments, but thatís not what Dell is saying.
If you are going to con people, you should concentrate on conning the ignorant. The recall of 4 million batteries isnít going to help from a public relations standpoint. Parents right now are buying personal computers, and notebooks for their kids to go back to school. This includes college sales. The battery problem could not have come at a worst time in terms of endearing the young consumer to Dell.
It probably made sense for Dell to announce that they were going to start buying processors from Intel competitor, Advanced Micro Devices for their low end Dimension series of desktops. You put it all together and itís going to take several quarters at the very least for management to turn this aircraft carrier size company around, and get it back on track. In the interim, this stock remains expensive.
You can not expect biased Wall Street to tell you the truth about Dell. The investment banking commissions on this company are huge. Whatís 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 .12 number for fiscal 08, we have a stock trading under and maybe lower, awaiting good news. If you give Dell a peer type price earnings ratio, itís 15 times a .12 and that gives you a stock, either way, itís not pretty. Keep in mind that institutions donít 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 donít see the turnaround in sight yet.
About the Author: Richard Stoyeckís background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and StocksAtBottom.com