Does anyone else remember those crazy days of the late 1990s when technology
companies were going up several points every day? Then theyd split their stock,
and it would just run up all over again? For the most part, these stocks had no
business running up the way they did. A few companies, however, had substance
behind the sizzle. One of them was based on the great idea that you could buy a
made-to-order computer just like getting a burrito at Chipotle. That concept was
created by Dell Computer (NASDAQ: DELL ). I held Dell stock back in those days
and rubbed my hands greedily together after every market close until the Nasdaq
crashed, I sold the stock and vowed never to get into tech again. I wondered
where Dell had gone in the interim, since computers now are a commodity, and
there was no way the company still could be based solely on that concept. It
isnt. Not even close. Sure, Dell still does the computer thing, but it also
provides servers, networking and storage solutions. The company also has moved
into software, such as operating systems, business and office applications, and
security products. Dell also is into IT and business services, like systems and
network management, infrastructure, applications, business process and business
consulting services. And Dell has an in-house financing option if you cant
afford any of these items. Then again, much of this stuff also is
quasi-commoditized. Everybody offers something like it Im talking about
Hewlett-Packard (NYSE: HPQ ) and IBM (NYSE: IBM ), just to name a couple. That
means big-time competition from big-time players. Somehow, Dell went from that
super-high-growth company to a tired veteran duking it out with the other
warhorses. If youre an investor, you probably can guess that means things like
tight margins and youd be right. Dells net margins are 5.3%, HPs are 7.6% and
IBM blows them both away at 14.7%. IBM keeps humming along with quarterly
revenue growth around 12%, while Dells is basically flat. And while Dells
earnings are expected to rebound sharply this year from $1.59 per share to $2
they are expected to be flat the year after, with annualized growth of only 6%
looking out five years. Considering that this year is responsible for 30%
growth, it suggests Dells growth will be flat thereafter. Yuck. Thats not to say
Dell doesnt make a lot of money. It does. That two bucks per share means net
income of $3.64 billion. The companys free cash flow has been around $3.5
billion in each of the past two years and was $1.45 billion in 2008. Dell
already has $2.5 billion of free cash flow in the first two quarters of this
year alone. The company has almost $5 per share in net cash. These are good
numbers. Conclusion If you back out the $5 in net cash, Dell is trading at the
equivalent of $10. Thats a P/E of just 5 on this years earnings. However, this
is a no-growth play at the moment, and despite all the cash it generates, I just
dont see why it has a place in any portfolio. If Dell tossed in a 4% to 5%
dividend, then wed have something to discuss. As of this writing, Lawrence
Meyers does not own a position in any of the aforementioned stocks.
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