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As a stock purchase idea, Del still doesn’t compute


Dear Mr. Berko:

I’ve been thinking again about buying some shares of Dell Computer. I recall a few years ago, when Dell was trading around $55-$57, I wrote and asked if I should buy 200 shares. You almost bit my head off while telling me “No!” Well, I’m back with the same question now that the stock is 20 points lower. Do you think this is a good entry point for the stock?

B.E., Fort Walton Beach, Fla.

Dear B.E.:

During the past month, I’ve received an enormous amount of mail asking if now is the right time to buy Dell Computer. I remember your letter of a few years ago. I’m sorry I was a bit rough, but I felt that was the only way I could get through to you. And as you can imagine, most papers would not have printed many of my comments, some of which might have sounded like blasphemy.

I think Dell Inc. (DELL-$34.93) makes a fabulous computer. But I’m going to tell you a little secret. Dell’s computers, for the average Joe and Jane, aren’t any better than a Compaq, eMachine, Apple or Gateway. Oh, certainly the spacey geeks and myriad emotional Dell-heads will go ballistic with indignation. However, for 99 percent of us, the difference between a Dell and the others is like the difference between a Ford and a Chevrolet or Chrysler. You plug all of those computers in the same way, their keyboards are almost identical, the insides are similar, and each takes you where you want to go.

In fact, Dell kind of reminds me of the automobile companies, the stocks of which are about as exciting as watching summer reruns of “The Waltons.” Dell will continue to grow its revenues and earnings but it’s basically a mature company.

The shares currently trade at a 35 price-earnings ratio, which, in my opinion, is too high by half. Its net profit margins are faltering (from 8 percent a few years ago to 6.2 percent this year) and return on shareholders’ equity has crashed from 52 percent a few years ago to an expected 38 percent this year. Those are still good numbers, but as those numbers came tumbling down, so did Dell’s P/E from a high of 74 a few years ago.

Margins in this industry are laser thin and Dell is cutting corners to squeeze costs into profits. But so are Gateway, Hewlett-Packard, Apple, etc. However, Dell is going a few steps further and toilet-training the U.S. consumer to accept inferior service. The next time you need Dell’s customer service, you’re going to ring a call center 12,000 miles away and speak to someone in India who will respond to your question by reading the answers from a prepared text.

But Dell’s big problem in a few years will be competition from Korea, China, India, Malaysia and Taiwan. Just as the Asians have toppled the Big Three automakers from their sacrosanct ivory-tower kingdoms, they will enjoy similar successes knocking Dell, Apple, Gateway, etc. from their pinnacles of power. As sure as God makes sweet, red strawberries, the current $34.93 share price, down from the high $50s a few years ago, reflects that uncertainty.

Still, Dell’s next few years appear quite sanguine. The company’s high-margin products — such as servers, storage and notebooks — continue to gain momentum. Dell’s low-cost direct sales are hurting its competitors. And Dell’s push into consumer electronics seems to be having some initial success.

So Dell’s interim prospects look bright and top-line growth should respond quite favorably. Revenues could increase about 45 percent from this year’s $48 billion to $71 billion by 2008 and earnings may increase to as much as $2 a share. But in my opinion, Dell is not worth 35 times earnings, which would put its share price at $70.

Though demand for computers will continue to grow, I believe that the power behind this demand will be fueled and driven by new technological innovations in personal computers and laptops. Dell is an innovator in the manufacturing and selling process, but the company does not have the technological experience or strength to take its products to the next generation. So, this time, I will very nicely tell you that Dell still doesn’t ring my bell.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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