DELL COMPUTER CORPORATION

James Hsu

Outline

Executive Summary Industry Overview Company Description Business Strategies Quarterly Income Statement Competitors Ratio Comparison Porter’s Five Forces Stock Performance News and the latest developments Discount Cash Flow DuPont Method

Executive Summary Recommendation: Hold Original Purchase: 500 shares @ $41.75 on 12/10/99 Current Price: $28.33 on 11/26/02 DCF result: $20.11 ~ $24.58 assuming 17% sales growth rate

over next 5 years. $25.14 ~ $30.73 assuming 20% sales growth rate.

Sales growth rate from previous 5 years: 32.06% Analysts’ consensus on growth rate for next 5 years according

to MarketGuide.com: 16.99%; It’s significantly lower than the previous 5 year growth rate.

At $28.33, Dell stock is fairly priced, if not slightly overvalued. However, the Company keeps grabbing market shares, and the quarterly numbers continue to improve. Also, its financial strength has been excellent.

Bottom Line: A great company richly priced. It’s worth holding but look somewhere else for better return.

Industry Overview: Computer and Peripherals Industry It’s been a tough year for this industry. Companies has

been postponing their IT equipment spending until the economy is recovering.

In the third quarter 2002 total PC shipment was 30.6 million units, down from 34.6 million units from the same quarter last year.

Many companies purchased a lot of equipments in 1999 to handle enormous amount of data for 2000. Therefore there’s little need for them to buy more equipment in 2000 ~ 2002. The economical downturn and 9/11 terrorist attack slowed down IT spending as well.

However, companies can’t defer upgrading IT equipment forever. Sooner or later, they have to resume their long-delayed IT projects. Valueline predicts that expenditure on hardware equipment and software should rise by some 7%~8% in 2003.

Industry Overview (cont.):

Personal computers have become commodity. Competition is severe in this sector and margin is low.

Lower-end computers (below $1000) with high-speed internet capability become the main selling force for PC companies. Dial-up internet will continue to fade away, and people need to upgrade their computers to satisfy the demand of high-speed internet.

Competition in peripherals (PDA, printers, etc.) is also intense. New entrants will drive the margin down even further.

Company Description Dell Computer Corporation, incorporated in October

1987, is a computer systems company and a provider of computing products and services.

The Company's primary product offerings include enterprise systems, notebook computers and desktop computer systems. The Dell line of high-performance computer systems includes PowerEdge servers, PowerApp server appliances, PowerVault storage products, PowerConnect networking products, Dell Precision workstations, Latitude and Inspiron notebook computers, and OptiPlex, Dimension and SmartStep desktop computers.

The Company also markets and sells Dell/EMC storage products under a long-term strategic relationship with EMC Corporation.

Company Description (cont.):

The Company provides targeted services for consulting, deployment and support, as well as an extensive selection of peripheral hardware, including hand-held products, and computing software.

The Company conducts operations worldwide through wholly owned subsidiaries. Sales outside the United States accounted for approximately 35% of the Company's revenues during the fiscal year ended February 1, 2002 (fiscal 2002).

Two types of customers: Relationship and Transactional.

Business Strategies Direct Business Model:

Advantage:

1. Lower cost: avoid dealer’s markup and pass the saving to customers.

2. Customized system: customers get exactly what they wants.

3. Lower inventory: 4 days of supply in inventory, and ability to incorporate the latest technologies into products (avoid accumulation of obsolete items in inventory).

4. Save time: takes only 36 hours to manufacture, test, and ship customized products.

5. Easy for customers to order: either log on www.dell.com or call 1-800-WWW-DELL.

Business Strategies (cont.):

Aggressive pricing strategy to maximize market share:

Result:

1. Industry-leading results in fiscal 2002 as year-on-year unit shipments increased by 15% while industry shipments declined 5%, resulting market share gain in every region and product line.

2. The Company widened its leading as the world’s No.1 supplier of PC systems (treating Compaq and HP as two different companies).

3. However, the gross margin declined to 17.7% from 20.2% the previous year.

Reducing workforce and exiting certain facilities to further cut cost:

Result: Total charges recorded were $105 million. But expected to result annual saving of nearly $500 million.

Business Strategies (cont.):

Continue to grow in enterprise systems:

The Company announced that it has expanded its line of network storage systems with the new Dell EMC CX600, a Fiber Channel storage array that offers enterprise customers high capacity, performance and availability while easing the deployment of storage hardware and software.

Entrance of printer business:

Dell Computer Corp. and Lexmark announced an agreement for the two companies to develop and produce Dell inkjet and laser printers and related aftermarket cartridges that will be sold directly to customers.

Entrance of PDA business: Axim X5

Quarterly Income Statement

Dollar in Millions 13 weeks ending  

(except Per share values) 11/2/02 8/2/02 5/3/02 2/1/02 11/2/01

total revenue 9144 8459 8066 8061 7468

gross profit 1662 1515 1391 1416 1313

operating income 758 677 590 594 544

net income 561 501 457 456 429

basic normalized EPS 0.217 0.194 0.176 0.175 0.164

diluted normalized EPS 0.213 0.189 0.171 0.17 0.157

Competitors in PC industry:

U.S. top five players:

U.S. PC market Share

DELL25%

COMPAQ13%

HP9%

GATEWAY7%

IBM6%

OTHERS40%

Competitors in PC industry (cont.):

Worldwide top 5 players:

PC sales slumpAlthough overall PC sales fell 12 percent worldwide in the third quarter of 2001 from a year ago, Dell's sales increased.

Company

Shipments (millions)Market

shareGrowth from 3Q

2000

Dell 4.23 13.8% 10.8%

Compaq 3.18 10.4% -31.1%

IBM 2.00 6.6% -17.2%

HP 1.95 6.4% -24.6%

NEC 1.05 3.4% -27.5%

Others 18.17 59.4% -7.8%

Source: Gartner Dataquest

Competitors in PC industry (cont.):

Worldwide PC market share

DELL14%

COMPAQ10%

IBM7%

HP6%

NEC3%

OTHERS60%

Competitors in PC industry (cont.):

DELL

HPQ

IBM

GTW

current price $28.67 $19.29 $86.20 $3.55

Market Cap.

$74.3B

$58.9B

$145.7B

$1.15B

P/E (ttm) 38.59

NA 26.14

NA

Sales (ttm)

$33.7B

$56.6B

$80.3B

$4.25B

Profit Margin (ttm) 5.90% -1.60% 7.20% -5.30%

Operating Margin (ttm) 7.80% -2.70% 7.40% -9.20%

ROE (ttm) 42.54% -4.65% 25.67% -18.61%

11/26/02

Competitors in PC industry (cont.):

Competitors in PC industry (cont.):

Competitors in PC industry (cont.):

Ratio ComparisonValuation Ratios Company Industry Sector

S&P 500

P/E Ratio (TTM) 36.04 25.06 31.68 23.17

P/E High - Last 5 Yrs. 105.71 45.51 67.30 49.97

P/E Low - Last 5 Yrs. 21.29 17.99 19.96 17.40

Beta 1.89 1.54 1.75 1.00

Price to Sales (TTM) 2.07 1.32 3.76 2.63

Price to Book (MRQ) 14.02 6.44 3.76 4.18

Price to Tangible Book (MRQ) 14.02 6.84 4.66 7.05

Price to Cash Flow (TTM) 32.28 22.86 21.15 15.80

Price to Free Cash Flow (TTM) 20.95 14.68 21.35 26.88

% Owned Institutions 55.30 50.12 46.01 61.40

Ratio Comparison ( Cont. )

Growth Rates(%) Company Industry Sector S&P 500

Sales (MRQ) vs Qtr. 1 Yr. Ago 11.14 9.74 6.53 3.74

Sales (TTM) vs TTM 1 Yr. Ago -1.61 -5.55 -2.45 1.58

Sales - 5 Yr. Growth Rate 32.06 11.91 19.25 11.33

EPS (MRQ) vs Qtr. 1 Yr. Ago NM -73.69 10.50 11.88

EPS (TTM) vs TTM 1 Yr. Ago 29.38 -8.66 -14.33 4.20

EPS - 5 Yr. Growth Rate 21.87 8.18 10.32 8.71

Capital Spending - 5 Yr. Growth Rate 21.59 5.90 15.54 10.28

Ratio Comparison

Financial Strength Company Industry Sector S&P 500

Quick Ratio (MRQ) 0.83 0.97 2.32 1.09

Current Ratio (MRQ) 1.03 1.27 2.83 1.61

LT Debt to Equity (MRQ) 0.11 0.41 0.25 0.74

Total Debt to Equity (MRQ) 0.11 0.62 0.33 1.02

Interest Coverage (TTM) NM 21.47 8.87 9.52

Ratio Comparison ( Cont. )

Profitability Ratios (%) Company Industry Sector S&P 500

Gross Margin (TTM) 17.58 28.86 50.56 47.7

Gross Margin - 5 Yr. Avg. 20.62 30.51 52.97 48.87

EBITD Margin (TTM) 8.18 8.31 18.16 21.12

EBITD - 5 Yr. Avg. 9.64 12.79 22.78 22.15

Operating Margin (TTM) 7.5 4.72 11.82 17.65

Operating Margin - 5 Yr. Avg. 8.99 9.04 16.96 18.19

Pre-Tax Margin (TTM) 8.09 6.02 12.31 14.93

Pre-Tax Margin - 5 Yr. Avg. 9.56 10.04 20 17.06

Net Profit Margin (TTM) 5.75 4.11 6.88 10.57

Net Profit Margin - 5 Yr. Avg. 6.65 6.95 12.44 11.23

Effective Tax Rate (TTM) 28.92 29.06 31.56 33.34

Effective Tax Rate - 5 Yr. Avg. 30.2 29.57 33.59 35.79

Ratio Comparison

Management Effectiveness (%) Company Industry Sector S&P 500

Return On Assets (TTM) 13.69 6.27 3.9 6.36

Return On Assets - 5 Yr. Avg. 19.46 11.13 10.03 8.05

Return On Investment (TTM) 30.46 12.62 6.38 10.11

Return On Investment - 5 Yr. Avg. 42.98 22.05 15.26 12.85

Return On Equity (TTM) 39.19 21.32 8.77 18.06

Return On Equity - 5 Yr. Avg. 55.9 35.77 20.41 21.86

Porter’s Five Forces & Analysis

Threat of New Entrants: MODERATE

Low capital investment for independent stores

Low product differentiation Brand name may be a barrier to entry

Low economies of scale No legal or governmental barriers Decreasing profitability shows that

there is a threat of new entrants

Porter’s Five Forces & Analysis (cont.):

Rivalry: HIGH

High concentration Price War: Low Margin Decreasing profitability Low differentiation However, in the midst of sever

competition, Dell can still gain market share from other competitors. That proves Dell’s business strategies have been successful.

Porter’s Five Forces & Analysis (cont.):

Threat of Substitutes: LOW Strong presence of PC’s throughout

society One computer for every three people in the

U.S. Only substitute for PC: Apple Computer.

However, high price, and lack of software support prevent people from switching to Apple system.

Porter’s Five Forces & Analysis (cont.):

Bargaining Power of Buyer: High

Highly price sensitive Reliability and customer service become

important factors. Dell’s products are very reliable and

customer service is outstanding. These two factors help Dell to create certain brand royalty. But that’s given the fact that the Company set the prices very low. If the prices are raised too high, customers will not hesitate to switch.

Porter’s Five Forces & Analysis (cont.):

Bargaining Power of Suppliers: HIGH

Large number of suppliers for components like hardware, keyboards, etc.

But two major inputs are monopolized Microsoft standard for all PC’s Intel standard for most PC’s

High switching costs

Stock Performance

Stock Performance (cont.):

News and the Latest Developments:

- Dell Computer Corp. To Unveil Smaller Servers For Companies:The Wall Street Journal reported that Dell Computer Corp. is expected to enter the market for ultrasmall server computers, unveiling a radical design that shrinks the size, power consumption and cost of running business computers. According to the Journal, Dell's 1655MC computer is a "blade" server that packages processor, memory and disk storage in book-size blocks that slide into a shared chassis like blades on a pen knife.

News and the Latest Developments (cont.):

Dell Computer Corp. Issues Q4 Guidance In-Line With Analysts' Estimates:   Dell Computer Corp. announced that its fourth quarter shipments could increase 10% from the third quarter, or 23% from the year-ago period. Fourth quarter 2002 revenues are expected to be up about 20% year-over-year, to nearly $9.7 billion. With anticipated further improvement in operating margins, the Company expects fourth quarter earnings per share of 23 cents, which is 35% higher than last year. Wall Street analysts on average are expecting the Company to earn 23 cents per share on revenues of $9.69 billion in the fourth quarter, according to Multex.

News and the Latest Developments (cont.):

Dell Computer Corp. Offers Customers New 3.06GHz Processor Option:   Dell Computer Corp. announced the availability of the Intel Pentium 4 processor running at 3.06GHz on select Dimension and OptiPlex desktop computers, and Dell Precision workstations. Customers can purchase systems with a 3.06GHz processor utilizing Hyper-Threading (HT) Technology, which can enable customers to do more tasks in less time. The technology makes more efficient use of processing power by utilizing moments of idle cycles that allow for the processor to work on more than one request simultaneously.

News and the Latest Developments (cont.):

Dell Computer Corp. Will Enter The PDA Market:Dow Jones reported that Dell Computer Corp. will release its first personal digital assistant (PDA) products in the U.S. in late November. According to the Journal, Dell will release two PDA products in time for Christmas, with the official launch date Nov. 18.

DCF and DuPont method

Go to the excel spreadsheet

Valuation: P/E Approach Assume 17% growth in sales Annual rate of return is calculated using cost

base = $41.75. Trade date was on 12/10/99. Case 1: use current P/E = 37

Price in 2/1/2008: $69.46, annual return = 6.49%

Case 2: use S&P 500 P/E = 28

Price in 2/1/2008: $54.02, annual return = 3.23%

Case 3: use P/E = 20

Price in 2/1/2008: $38.59, annual return = -0.97%

Valuation: Growth in Sales Terminal Growth Rate = 4% Case 1: Analyst consensus growth rate = 17%

Fair Value = $20.11 ~ $24.58 Case 2: Dell’s 5 yrs growth rate = 32.06%

Fair Value = $51.16 ~ $62.53 Case 3: growth rate = 10%

Fair Value = $10.20 ~ $12.47 Case 4: growth rate = 20%:

Fair Value = $25.14 ~ $30.73