Dell Computer

After a dizzying fall, the PC maker's shares may have finally hit the floor.

Michael Dell is buying. That was the word on the street on January 2, when the chairman and CEO of the number two PC maker, Dell Computer, added nearly 12 million shares to his already rather substantial holdings by exercising options. It was a hopeful sign and reversed the overwhelmingly bearish trading pattern of Dell senior executives and directors, whose insider sales dwarfed purchases by a ratio of more than one hundred to one in the fourth quarter of last year. Securities and Exchange Commission filings show that Dell himself sold some 18 million shares—and purchased none—in 2000. Of course, Dell's risk in investing in his company's battered shares was tempered by the exercise price of his options, which ranged from $0.98 to $4.63 per share. Less fortunate investors, many of whom watched in disbelief as their shares in Dell's company tumbled 66 percent last year, are licking their wounds and wondering whether shares of the bellwether computer manufacturer have finally hit bottom and the low share price presents a buying opportunity.

The good news is that the stock showed strength in the wake of the mid-January announcements of layoffs at Gateway and a profit warning from Hewlett-Packard. In the weeks following Michael Dell's January 2 purchase, the stock rose a healthy 38 percent. Still, Dell and its PC industry cohorts Apple Computer, Compaq, Gateway, and Hewlett-Packard are all sharply off their 52-week highs.

Of the beleaguered PC makers, Dell's shares are selling at a relatively rich multiple, about 30 times earnings, compared with an average of 19 for Gateway, Hewlett-Packard, and Apple Computer. That premium reflects the market's belief that Dell has an advantage, thanks to its recent push into higher-end computers, which still show signs of growth. "Dell has aggressively moved to increase the business it derives from storage and servers," says David Bailey, a computer hardware analyst with Gerard, Klauer, Mattison, and Company. (Nevertheless, for the quarter ending October 27, 2000, Dell derived more than half of its net revenue from its desktop-computer product line.) Dell's extension of its fabled direct sales model to more-expensive products makes it the best-positioned personal computer maker for today's challenging environment, says Bear Stearns analyst Andrew Neff. More encouraging still, Dell appears to be leading a successful price war in an attempt to edge out rivals and gain permanent market share. Though fourth-quarter profits were just 18 cents a share compared with Wall Street estimates of 25 cents, the company's sales rose more than 40 percent year-on-year—extremely robust expansion in a sector whose growth this year is forecast at 10 percent. According to Neff, Dell's growth has positioned it to wrest market share leadership from Compaq in a year or two.

The bad news? Don't expect much of a rebound in the share price until at least the second half of 2001, when the PC industry should begin to benefit from the adoption of Microsoft's latest operating system, Windows 2000; the accompanying upgrade cycle for corporate PCs; and easy year-over-year comparisons, says Robertson Stephens' Eric Rothdeutsch. In the near term the outlook for the industry is pretty depressing. Sales growth is slowing. PC shipments in the U.S. grew by just 6.4 percent in the fourth quarter of 2000 over the same period in 1999, reports research firm Gartner Dataquest. (That's the slowest rate since Gartner began keeping track, in 1993.)

Worse for PC makers is the fear that the market will dry up as a result of competition from wireless Internet appliances and other innovations that will make desktop computers obsolete. But competitors and industry pundits have been predicting the demise of the PC for years. And for years Michael Dell has laughed all the way to the bank. It may be time to start betting on him again.

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