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Top value investors are farming in the DELL


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August 18, 2006

Top value investors are farming in the DELL

Aaron Pressman

Dell’s cratering again today, down 7%, after last night’s disappointing second quarter earnings report. But there’s less than meets the eye to the reaction – it looks like the growing interest of top value fund managers like Mason Hawkins and Wally Weitz is putting a floor under the stock. Long-term investors might see the same opportunities as those smarties. In fact, today’s decline only takes the stock back down to about where it was on Monday, and still about 10% above the low it hit last month when the company “pre-announced” its second quarter disappointment.

Hawkins, who runs the Longleaf Partners Fund (Symbol: LLPFX) that has walloped the S&P 500 in 2006 and over the past 1, 5 and 10 year periods, recently called Dell’s stock price an “extreme undervaluation” and said he’s been buying (PDF). Weitz, whose Weitz Value Fund (WVALX) has also far outperformed the S&P over the past 5years and longer, doesn’t usually dabble in tech stocks. But Dell is worth “considerably more” than its current price, he said recently (PDF).

Back on July 21, Dell first disclosed it would post surprisingly horrible earnings per share and revenue for the quarter, but the actual earnings report yesterday also included a stunning 3 percentage point drop in gross profit margin and disclosure of an SEC investigation. The total number of employees also rose almost 14,000 to 75,000 from a year earlier, as Dell said it had moved away from temps and outsourcing to putting folks on the payroll in order to improve customer service.

Further, CEO Kevin Rollins and other execs on the earnings call with analysts had little concrete to say about how they’d get the company back on track. In a typical Rollins reply to the myriad questions from analysts about the pricing and margin problems, here’s what he said when pressed about his expectations on the costs of components for the rest of the year:

“Again, I'm afraid we're not going to be able to share with you all of the things we are doing and knowing there, other than to let you know that we're very focused on component costs, as well as general, what we call structure materials, materials we put into every system, as key enablers in the back half of the year.”

Perhaps not surprisingly, the analyst in question, Goldman Sachs’ Laura Conigliaro, slapped a “sell” rating on the stock. Bear Stearns analysts cut their fair value to as low as $18. Analysts hate it when companies won't give them the specifics so as far as they are concerned, the next couple of quarters might be bad, too.

So you have a choice. Go with the quarter-to-quarter folks on Wall Street. Or you can follow the long-termers, who perhaps not coincidentally work out of offices in Memphis and Omaha.

12:41 PM

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Gentlemen: After the tech rampage several years ago I was taught a lesson- go with high quality predictable earnings stocks (blue chips. Some of these analysts seem to always put a positive spin on companies who miss their earnings. Their take seems to always be that they are undervalued and a real bargain. My take is that they can go lower so why take a chance when you can buy quality companies that are always making money namely Proctor & Gamble, Bank of America, Johnson & Johnson to name a few. These stocks in particular pay attractive dividends as well. Go with the predictable winners especially in choppy markets like we are in right now. Bill Ruhe, St Louis, MO

Posted by: Bill Ruhe at August 20, 2006 09:16 AM

Dell is a major player in the tech sector. The stock has already taken a big hit. I think the chances of stock price going further lower are very slim. This is an excellent opportunity to buy the stock. There is simply a lot more upside than the downside at this point in time.

Posted by: google123 at August 20, 2006 07:54 PM


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