Dell-Case Study In Corporate Self-Destruction
Author: Richard Stoyeck

All companies go through various cycles of growth at various
speeds. This is also true in the way in which the stock market
embraces them, and then spits them out, and throws them away.
The market darling at the moment going through such a cycle is
Dell Computer. This company is now in the process of switching
places with also-ran Hewlett-Packard which was out of favor for
years.

Since Dell's inception in the 1984 and later its public
offering, the company could do no wrong. Its sales are now
approaching $60 billion dollars and its number 25 on the
Fortune 500. They have utilized a direct model approach to
building PC's since the beginning. This eliminated the
middleman, and allowed you the customer to build your computer
to order. In other words, you got a custom made machine. This
is also the only company I have encountered with a negative
cash conversion cycle. They get your money before they owe it
to the vendors who sell them the parts. It's literally unheard
of in business.

How things can change in the blink of an eye

This company once had the finest customer service in the
business. The whole deal was moved to India with disastrous
effects. I have encountered no one, that's right no one who has
a decent word to say about Dell's customer service. I have had
several encounters myself with Dell's version of customer
service. Let me illustrate one. I had to spend a ridiculous
period of time explaining my address. It's simple I live in
Westport, CT., but if you have ever tried to send a package to
Europe, the addresses work differently. I can't imagine, how
they do addresses in Bangalore, India where these call centers
are.

If a person has no feel for your culture and the way you
conduct your life by being immersed in that culture, it's comes
right through on the telephone, and that's Dell's problem in
India. A company replaces thousands of Americans with
foreigners, and then thinks it's going to be okay. What Dell
doesn't realize is that people vote with their feet, and they
are now voting for Hewlett Packard, and other Dell competitors.


Exploding computers-Fires on Planes

Dell's recall of several million computers because of exploding
batteries illustrates how management has lost touch with
reality. Years ago, Johnson and Johnson had a public relations
nightmare over the tampering of several shipments of Tylenol.
How JNJ handled the PR from this scandal is a showcase example
that is studied daily in colleges across the country. Dell did
not confront their exploding batteries problem directly. They
dodged, they hemmed, and they yawed. This resulted in a
tremendous loss of consumer confidence in the company that will
take years to rebuild, if in fact they can rebuild it.

Who's driving the bus?

Dell has now announced a 41% drop in their fiscal
second-quarter profit, and now there are accounting issues
facing the company. In their announcement Dell attributed the
earnings decline to overly aggressive pricing. This is utter
nonsense. The company should be more forthcoming about their
problems. The aggressive pricing that they are alluding to is
not reflected in the numbers I see. I have looked at both their
desktop and notebook average selling prices for the last two
quarters. They were flat on a sequential basis, so what are
they talking about? Server ASP's were even up on a sequential
basis. The folks at Dell have to come up with a better story.
On a year to year basis there are price declines in the
desktop, notebook, and server ASP segments, but that's not what
Dell is saying.

If you are going to con people, you should concentrate on
conning the ignorant. The recall of 4 million batteries isn't
going to help from a public relations standpoint. Parents right
now are buying personal computers, and notebooks for their kids
to go back to school. This includes college sales. The battery
problem could not have come at a worst time in terms of
endearing the young consumer to Dell.

It probably made sense for Dell to announce that they were
going to start buying processors from Intel competitor,
Advanced Micro Devices for their low end Dimension series of
desktops. You put it all together and it's going to take
several quarters at the very least for management to turn this
aircraft carrier size company around, and get it back on track.
In the interim, this stock remains expensive.

You can not expect biased Wall Street to tell you the truth
about Dell. The investment banking commissions on this company
are huge. What's it worth. This is simple. The peers are
outperforming Dell and the peers are selling at 15 times
earnings. Dell only deserves a premium to the peers because of
its past illustrious history. If you give Dell a 17 PE
multiple, and you believe the $1.12 number for fiscal 08, we
have a stock trading under $20 and maybe lower, awaiting good
news. If you give Dell a peer type price earnings ratio, it's
15 times a $1.12 and that gives you a $17 stock, either way,
it's not pretty. Keep in mind that institutions don't like to
explain stupid investments to the people that give them the
money to manage. If Dell is still in the doldrums at year-end,
the institutions will bail big, rather than explain it. Dell
will become the ultimate year-end tax loss selling candidate,
and we don't see the turnaround in sight yet.

Goodbye and good luck,
Richard Stoyeck


About The Author: Richard Stoyeck's background includes being a
limited partner at Bear Stearns, Senior VP at Lehman Brothers,
Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace
University, NYU, and Harvard University, today he runs
Rockefeller Capital Partners and http://StocksAtBottom.com
http://www.stocksatbottom.com