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PC Wars-The Saga continues

At one time Dell Computer was one of the extraordinary growth stories in America. Michael Dell could do no wrong. There then comes a time in every entrepreneurís career when he or she has to recognize, itís time to step aside and let new, historically proven managers come in and run with the ball.

Michael Dell stepped down two years ago, and turned the ball over to Kevin Rollins who runs the company on a day to day basis. Dell either has to be kicking himself in the butt for turning the reigns over to Rollins, or be happy that he himself is not on the firing line at the moment.

Dell was innovative in selling directly to the consumer as a business model. It worked brilliantly for years. The firm had no equal in the direct to consumer market. Dell also was encouraged to sell big time to the corporate market. All great technology oriented growth companies hit walls. My work shows that it tends to happen about 7 years or so into the growth process. The exceptional growth company can take longer before it hits the wall, and has to reinvent itself. The word reinvent is the correct one to use.

Microsoft has now entered such a period, having become a cash cow as opposed to being a growth company. In my history of technology investing which goes back 35 years, I have never found a growth company that has not hit a wall somewhere in the growth process.

What happens is that companies at some point tend to rest on their laurels, their past successes and glories. They become so committed to what they are doing, that they become incapable of seeing the next revolution sneak up behind their backs and challenge them for supremacy. It always happens and itís always the same way with the same result. Never have I seen a single growth company that could reinvent the revolution. Itís always some new kid on the block that spearheads the next new thing.

The consumer has probably now reached a stage where he wants to walk into a store and see what heís getting for his money as opposed to just reading specs on his computer and talking to an outsourced person in India who is absolutely clueless about American culture.

In the last five quarters, Dell has missed on the estimates that it has given Wall Street. In the last quarter there has been a 51% decline in quarterly profit, and now a recall on 4 million laptop batteries to boot (no pun intended). This is not the way to run a major Fortune 100 company.
Things always get worse before they get better

When a growth company hits the wall and starts to decline, the decline usually has to go for quite a while before a new management team takes the reins and starts to engineer a midcourse correction. This is like turning an aircraft carrier around. First you have to make the decision to go another way. You then have to get everybody else on board quickly. It takes several miles to get a carrier turned around at sea; itís not easy for corporate management to do it either.

Dell will have to re-examine its direct to customer sales model, because right now Hewlett Packard is eating them for lunch. The stock is down 60% from its high for good reason. The stock market is telling you something. Is anybody listening down there in Texas.

Dell bet big on the corporate market, and completely failed to take into account the changing sentiments of the consumer market. Dell needs to grow bigger outside the United States. Everyone agrees that the US market is not really a growth market at the moment. The firm must increase international sales to a point where itís growing 15 to 20% internationally. I donít see it happening.

Somebody and not Rollins has to address the lackluster customer service in this country. Why not Rollins? Itís because he was in charge of the company when the problem became a problem. You never want the guy who was involved with the problem to be the guy who fixes the problem. Heís too busy protecting himself than to fix the problem. Thatís management 101.

Dell use to be almost perfectly run. They had the low cost model, and the competition, namely Hewlett Packard, Acer, Apple, and Chinaís Lenovo were always playing catch-up, and stumbling trying to catch up. Why did they stumble, itís the same in football, you go for the long bomb when you are behind in the fourth quarter. Now the competition finds its model working, and Dell is stumbling.

I realize that Dell has spent money fixing customer support, and trying to convince people that their product is no longer a commodity. I have seen zero results from this expenditure at this time. In my own work as a money manager, I have lowered my estimates for this company six times in the last twelve months. I currently do not carry it in a single portfolio. Fortunately, I missed the whole move downward, and I am not willing to bet on this company yet.

Yes, Dell is now considered a value stock by many. The problem is that the growth players havenít been completely washed out of the stock yet. This will take more time. The institutions that have had a tough time performing this year will be under pressure to rid their portfolios of Dell by year end if the stock doesnít perform. Dell has agreed to market processors by AMD as well as Intel. They will probably take a hit to their margins because Intel was probably rebating them back a portion of the sales to be an exclusive with Dell.

The company is still sitting with almost billion in cash on the balance sheet, which works out to about .50 per share. Wall Street is in the process of lowering estimates for 07. Hereís the bottom line, with Dell you still have a valuation risk. Hewlett Packard is growing faster and selling cheaper. The only reason to own Dell here is its previous extraordinary history, but in stocks the past is not always prologue to the future. A stock has no ideas where it traded yesterday, and Dell has to execute on a believable strategy. Go figure.


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
Value Investing




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