Stock Picks: Dell, Gap

Plus Wall Street analyst opinions on RealNetworks and Dress Barn

Dell Inc. (DELL)

Kaufman Bros. maintains hold

Shares of Dell Inc. fell Nov. 20 after it reported weaker-than-expected revenue and profit for the third quarter as the computer maker missed out on a fledgling rebound in technology spending.

After the close of trading Nov. 19, Dell reported a net income of $337 million, or 17 cents per share, compared with $727 million, or 37 cents a share, in the same period a year ago. Excluding one-time items, Dell posted earnings of 23 cents per share. Revenue fell 15% to $12.9 billion.

Kaufman Bros. analyst Shaw Wu said Dell's weak quarter was "surprising" and proves that its turnaround attempts weren't working. Acer overtook Dell as the world's second-largest computer maker in the last quarter. Dell said it would rather give up market share than deeply discount to defend its turf.

He noted that Dell's peers, including Apple Inc. (AAPL), Hewlett Packard Co. (HPQ), IBM Corp. (IBM) and others have reported strong results.

Wu also took issue with the quality of Dell's earnings per share because of the "sizable" gap between what the company reported that conforms to official accounting principles and its pro forma profit excluding certain one-time items. Companies issue pro forma earnings to separate out charges and gains that cloud its true operating performance. But it could be used too aggressively to dress up flagging profits.

"One has to wonder if Dell can classify restructuring expenses as one-time items when they keep recurring," Wu said in a Nov. 20 research note.

Gap Inc. (GPS)

BMO Capital Markets keeps market perform

Retailer Gap Inc. said on Nov. 20 that its sales are improving after a tough few years, and a big advertising push this holiday season could boost sales -- but analysts caution that a rebound may be bumpy given the rough retail environment.

Gap said quarterly earnings climbed 25% as a key sales measures at its Old Navy stores rose 10% -- the first gain in at least two years. Sales at Banana Republic also improved after a lackluster period. The results stoked hopes that Gap's turnaround is taking hold.

Gap has made a strong turnaround with its Old Navy chain, repositioning the discounter to cater to frugal moms and improving stores, and has an excellent balance sheet. But investors' expectations for improvements in market share are already reflected in Gap's share price, said BMO Capital Markets analyst John Morris.

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