Free Web Hosting - Watch Free Movies Online - Watch Free TV Online - Free Web Pages
Fetch Local Gas Prices by zip code and save hundreds of dollars on gasoline, diesel, and ethanol fuel.
|
Free Web Hosting - Watch Free Movies Online - Watch Free TV Online - Free Web Pages Fetch Local Gas Prices by zip code and save hundreds of dollars on gasoline, diesel, and ethanol fuel. |
Though
computer technology may be an exciting place to be right now with all the new
innovations, to remain competitive in this industry, a company must be able to
stay at the forefront of new technology. Once a luxury; the computer is now
considered as much a staple as any other household appliance and consumers have
come to expect more from their computer than they did 10 or 15 years ago. Dell
Computer Corporation founded by Michael Dell while still a student at the University
of Texas has tapped into this computer culture and has managed to hold the
number one spot in “worldwide market share.”
Michael Dell was aware that the key to success would rely on the ability
to deliver “state of the art”
technology, exceptional quality, and personalized service at competitive
prices.
Dell Computer Corporation designs, develops,
manufactures, markets, services and supports a wide range of computer
systems. This “full range” of computers
systems includes desktop computer systems as well as Notebook computers,
workstations, network servers and storage products. The company also has an “extended selection of peripheral
hardware, computing software and related services”. (Dell Annual Report 2000)
Dell offers extensive on-line technical support as well as on-line
ordering. “ Dell revolutionized the
personal computer business with an aggressive direct purchase business model
and early adoption of the Internet. (FoolMart, www.fool.com)
INDUSTRY ANALYSIS
The computer hardware industry is
propelled by continual improvements in technology. This constant progressive
movement results in “frequent introduction of new products, short product life
cycles leading to obsolescence and continual improvement in product
price/performance characteristics.” (
Dell Annual Report 2000 pg. 14) Recent trends in the PC end market have
generally been strong since computer sales have been strong, however: there was
a slip downward in the PC sales in the third quarter of 2000. “Worldwide PC unit shipments topped 113.5
million in 1999, an increase of nearly 22% over 1998, Standard & Poors and
Industry research firm IDC of Framingham of Massachusetts, both anticipated
growth to about 19% in 2000 with shipment range of 134-135 million. They also predict “restrained 17% growth in
2001. (S&P Industry Pg. 2)
The recent PC Expo held in the Jacob Javits
Convention Center in Manhattan was a perfect example of changing technological
needs of the consumer. The “most
glaring omission at PC Expo was the PC.” (Williams, pg. A47) More prominent
were the laptop, Palms™ and other
technology that offered wireless
capabilities. Computer technology is
now leaning into “hot syncing” which allows a wireless to communicate with
notebooks and desktop PCs. Due to come
out early next year is the USB 2.0. It is an accelerated version of the
technology that “hooks up peripherals, such as scanners, printers and digital
cameras to a home computer.” This
advancement allows the consumer to take the home computer information wherever
he happens to be. This wireless freedom along with the transfer rate of the
USB2.0 that is said to be 40 times faster than the USB 1.1 is certainly going
to impact the PC industry considerably. In fact it was announced that “the
accounting firm “PricewaterhouseCoopers would be jumping on the wireless
bandwagon by recommending Palm Handhelds to clients as a way to increase
profits by making employees more productive.” (Williams, pg. A47)
To attract consumer interest, the computer
industry must now find ways to link other aspects of the consumers life to the
computer. Some of the systems that are
designed to do just that are Sony’s new system that includes a built in MP3
music player and Panasonic $1,500 component that will record high-quality video
onto a high capacity blank disk.
MANAGEMENT DISCUSSION AND ANALYSIS
Dell Computer Corporation’s
management teams goals are to maximize stockholder wealth by executing a
strategy that focuses on a balance of three priorities Liquidity, Profitability and Growth. It is Dell’s policy to not pay out cash
dividends to common stockholders so as to reinvest profits in the company. Dell’s
strategy has worked well; they have “consistently been a leader in liquidity,
profitability and growth among all major computer systems companies” (www.Dell.com). While there has been dramatic changes in computer technology,
Dell believes the most exciting period for computing and for the company is
“yet to come.” Dell now intends to
expand on the direct model approach to become not only world leaders in global
computer sales but also leaders in customer service.
BUSINESS STRATEGY
The
company’s business strategy is focused on its direct business model. Using this model Dell hopes to deliver
superior customer experience through “direct, comprehensive customer
relationships.” Dell’s management
believes that “by selling computer
systems directly to the customer, the company could most efficiently understand
and satisfy the computing needs of customer” (Dell Annual Report 2001 pg. 3)
The company strives to maintain a close relationship with its customers. To achieve this goal, Dell has
representatives that make frequent calls on customers to assess their changing
computer needs as well as sales people who call on present and potential future
customers.
The Direct Model
Dell
Computer Corporation “the worlds largest direct computer systems company” has
designed a plan called it’s “Direct Model.”
The direct Model is broken up into five parts, price, performance, customization,
reliability, services and support. This
will be delivered with the latest
technology, and produce superior shareholder value.. Technical support too can be contacted on-line, by phone or in
person.
The customer base that utilizes Dells products
and services include large corporations, government, education customers, small
to medium business individuals and healthcare.
Dell
sells customized computers directly to the consumer. This allows company the ability to operate with reduced levels of
component and finished goods inventories.
This critical advantage gives Dell the competitive advantage by not only
eliminating retail markups but because of the low inventory rate, the risk for obsolescence is reduced. “ The
changes in the hardware arena are staggering.
Every few months there are newer, faster processes” (Woodworth, pg. 23.)
As a further extension of the direct
model, the company offers all domestic customers, a spare parts ordering system
and a virtual help desk.” This system can
also direct link the customer to technical support information. To further utilize the Internet as a selling
tool, in fiscal year 2000, Dell expanded its Internet presence with the launch
of www.gigabuys.com where more than
30,000 computer related products could be purchased. Web hosting services are offered through an Internet provider
operation called www.dellnet.com. This market comprised 13% of the company’s
overall sales revenue up from 10% from 1999.
The company receives in excess of
500 million page visits per quarter to www.dell.com .
(Annual Report 2001. P 4) In December of 2000 the web sight was the third most
visited web sight in the United States. The company plans to further utilize
the Internet to better serve its customers.
Though the company sells its services to
large corporate, government, educational and healthcare institutions, it’s
receivables are well diversified so that the loss of one large customer won’t
adversely affect the company’s revenue structure to a critical extent. Dell’s diverse
customer base allows for more flexibility, during the fiscal years 1998 through
2000, no single customer accounted for more than 10% of the consolidated net
revenue.
COMPETITION
·
Apple
Computer
·
Compaq
Computer corporation
·
EMC
Corporation
·
Gateway,
Inc,
·
Hewlett
Packard Co.
·
International
Business Machines (IBM)
·
Lexmark
International Group
·
NCR
Corporation
·
Network
Appliance
·
Palm
Inc.
·
Sun
Microsystems
Because the computer
hardware industry is so highly competitive, companies don’t have the luxury of
sitting back on their accomplishments while hungry computer companies are out
snapping up the latest technology. A successful
company must be always looking to expand to be able to handle virtually any of
their customer’s needs. Though there are many competitors in the market, Dell’s
three main competitors are Compaq, IBM, and Hewlett Packard.
Compaq,
Dell’s fiercest competition, is vying Dell to be the world’s #1 PC maker. Compaq has already launched a plan that is
very similar to Dell’s direct model. Compaq’s business plan includes a
“stronger sales pitch to small and medium sized businesses and programs.” The Compaq plan though has extended their
plan to include the “utility pricing model” which bills customers for hardware
and services based on a per use basis. Like Dell, Compaq is concentrating on
simplifying and providing complete solutions to customers. (Feder, pg. C1)
Fiscal
year 2000, Comparison of Dell’s Top Competitors
|
1 YR |
IBM |
HPQ |
C Compaq |
DELL |
|
Sales (mil.) |
$88,396 |
$48,782 |
$42,383 |
$31,888 |
|
Growth |
1% |
15.1% |
10% |
26.2% |
|
Net Inc. (mil) |
$ 8,093 |
$3,697 |
$569 |
2,177 |
|
Growth |
4.9% |
5.9 |
0% |
30.7% |
|
Employees |
316,303 |
88.500 |
94,600 |
40,000 |
|
Growth |
2.9% |
4.9 |
11.2% |
9.6% |
|
|
|
|
|
|
DELL
PRODUCTS - RESEARCH AND DEVELOPMENT
In the future, the company expects to expand
on the direct model that has served so well in the past. Also “Dell has generally invested in
emerging technology companies with business objectives built around the
Internet, services, server and storage products and communications.” (Dell
Annual Report 2000, pg. 11)
Product development is focused on
designing and developing technology that offers the flexibility customers
expect and does so at a competitive price.
Dell closely monitors technology developed by others and obtains that
technology that it feels will benefit the company. To maintain customer
confidence the company takes steps to ensure quality. Dells staff includes programmers, technical project managers
engineers who are well versed in logic board design, sub-system development and
mechanical engineering.
Dell incurred $568 million in
research, development and engineering expenses in fiscal year 2000. This expense included a $194 million
write-off of purchased in-process research and development that will be further
discussed in the section titled Acquisitions and Expansion. Research and development expenses show that
Dell is serious about keeping pace with the ever-changing face of computer
technology. The company chooses
activities that focus on enterprises that will have the most positive effect on
the company’s revenue and allows for the highest return on capital.
Further proof that Dell is
constantly focusing on emerging technology is its licensing agreements with
Microsoft Corporation for various operating system and application
software. Though the agreement is not
exclusive, Dell can look to any advancement that Microsoft has to offer so that
it’s not left behind in the technology race.
At this time Dell already holds a portfolio of 510 U.S. patents and 431
U.S. patent applications pending. This
total does not include foreign existing and patents pending. Though it may seem obvious that patents are
filed but not thinking ahead can too invite competition. By not demanding an
exclusive license from Microsoft for MS-DOS, IBM missed out on a golden
opportunity in allowing Microsoft to market that operating system to any
hardware manufacturer thereby eliminating IBM’s uniqueness. “Compaq and Dell can trace their lineage to
that miss-stroke of stupidity”. (Kaplan, pg. 137)
In fiscal year 2001 Dell utilized
$482 million in cash to improve to improve and equip its manufacturing and
office facilities to keep pace with the company’s continued growth. Similar
expenditures fiscal years 2002 are expected to be in the range of $300-$350
million.
The company’s continued dedication
to providing their customers with top of the line technology, requires constant
investment in research and development with the expectation of improving and
developing efficient manufacturing and distribution processes and to introduce
new products. In doing so research and
development expenses have increased each year however in the computer
technology industry this expense is necessary since technology becomes obsolete
so quickly the only way to remain at the forefront of the industry is to
continue to search for and find advanced technology. Growth required enhancement and expansion of not only its information systems, but also
the management team, the manufacturing operations and other aspects of the
company’s infrastructure.
Acquisitions and Expansion
In an effort to keep pace with
emerging technology, Dell computer purchased all the outstanding shares of
ConvergeNet Technologies, Inc. October 20, 1999. ConvergeNet develops storage domain management technology for
enterprise storage area networks. The purchase was for in-process research and
development. Dell paid a total of $332
million that consisted of 6.9 million shares of Dell’s common stock and $4.5
million in cash. The acquisition was recorded using the purchase accounting
method meaning management used the fair value of the company to report the
financials of the acquired company. The
ConvergeNet’s purchase price minus the fair value left $132 million in
goodwill. The goodwill was amortized on
a straight-line basis for 3 to 8 years.
This information appears on the Income statement supplied in the
appendix.
During the fiscal year 2000, the
company expanded operations to Nashville, Tennessee area and opened a manufacturing facility in
Eldorado do Sol, Brazil to serve Latin America.
GEOGRAPHIC DIVERSIFICATION (Globalization)
Dell
is headquartered in Round Rock, Texas however recognizing the benefits of
globalization; the company conducts business on a worldwide basis. A substantial
amount of revenue is generated from sales in other countries. Dell’s future
growth rate and success are in part dependent on continued growth in the
international market. Sales outside the
United States accounted for approximately 33% of the company’s revenue for the
fiscal year 2001. Dell offers multinational corporate customers several
programs designed to provide “global capability, support and coordination.”
(Annual Report 2001 pg. 5) To achieve
this Dell provides single points of contact to accommodate all of the corporate
customers’ needs. Dell’s management feels “continued worldwide growth by
increasing the company’s market presence in its existing markets, and pursuing
additional product opportunities will have a positive impact on future revenue.
As of February, 2001, Dell
Corporation “owned or leased a total of approximately 10 million square feet of
office, manufacturing and warehouse space worldwide. The international
facilities consisted of approximately 3 million square feet of office and
manufacturing space in 33 countries.
The idea that “technology is leading to the spread of a global culture”
is a concept that has already been grasped by Dell. ” (Germain, pg. 211)
Dell conducts operations in America,
Europe and Asia-Pacific and Japan regions.
The company’s manufacturing facilities are located in Austin, Texas;
Nashville, Tennessee, Eldorado do Sol, Brazil; opened during fiscal year 2000
to serve Latin America; Limerick, Ireland; Penang, Malaysia; and Xiamen,
China. The increased “reliance of the
global economy on data and telecommunications networks to facilitate rapid
exchange of information” is forcing the computer companies to constantly be
searching out advanced technology that can be used to achieve this goal. (S&
P Industry pg. 2.) The consistency and
speed at which this information can be transferred is going to be the task of
the Computer industry.
Computer Technology “is really a
global business, which demands frequent contact with national and international
vendors regardless of geographic location or time zone.” (Woodworth pg.
23) To achieve this goal, Dell has a
sales force that is capable of calling on customers throughout the world.
Approximately 1.6 million square
feet of this space is leased property that won’t expire until December
2013. The majority of the property
occupied by Dell is an operating lease and recorded only as a rent expense
however in certain leases Dell is required to pay maintenance, taxes and
repair.
FINANCIAL ANALYSIS
Dell’s effective tax rate was 30%
for fiscal year 2001, 32% for fiscal year 2000 compared to 30% for fiscal year
1999 and 31% for fiscal year 1998. The
differences reflect the changes of geographical distribution of income and
losses and certain tax-deductible charges.
The company’s effective tax rate is still lower than the U.S federal
statutory rate of 35%. This too is due to the geographical distribution of
income.
Increased revenue in 2001 was
principally due to increased sales of units.
Shipment grew 29%. Unit sales grew 47%.
Dell shipments ranked number one in the United States and number two
worldwide, moving up from positions two domestic and three worldwide from
1998. Unit sales grew 47 during fiscal
year 2001. Notebook computer sales
increased by 52%. Desktop computer
systems increased 22%. Several factors
affected the sales increase including aggressive market penetration and the new
higher end products. Unit sales in 2000
grew 50% notebooks grew 61% and desktops grew 46%. These figures show that the newer technology, the notebook
computer sales increase surpassed desktop sales.
These figures alone is a clear
indication that computer technology is headed toward the wireless division. Though
the total sales grew throughout fiscal year 2000, the average revenue per unit
sold decreased by 8% compared to 1999.
This was due to pricing strategy Dell utilized to generate sales and
bring in new customers. Throughout the
United States, sales represent the majority of the total absolute revenue,
Asia-Pacific and Japan grew at a faster rate than either the U.S or
Europe. Average revenue per unit
decreased by 2% compared to fiscal year 2000 primarily due to price
reductions.” (Annual Report 2000 pg. 19)
Undoubtedly the sluggish economy contributed to the 6% decline in
revenue per unit in the fourth quarter of fiscal ear 2001. This 6% was lower than the full year average. Sales in Europe increased by 20%, the sales
in Asia-Pacific and Japan increased by 56% in fiscal year 2000. These same
markets increased 58% in Europe and 37 % in Asia-Pacific and Japan in
1999.
Dell ended fiscal year 2000 with
$6.9 billion in cash and investments.
This total is more than double the investments from fiscal
year1999. Cash flows from operating
activities resulted primarily from the company’s net income, changes in
operating working capital. It was also
affected by the income tax benefits resulting from the exercise of employee
stock options.
Debt
As of February 2, 2001 Dell’s
short-term debt securities of $524 are scheduled to mature within one
year. The balance of the debt matures
within five years. The maturities on Dell’s debt investment have maturities of
less than three year, suggesting the credit risk for Dell Computer is minimal.
Though Dell had access to a revolving credit line of $252 (expires June 2002)
it wasn’t used in the fiscal year 2000 or 2001.
Investments
Dell invested a significant portion
of available cash in highly liquid investments with maturates of three months
or less. This would suggest that the
company is highly liquid. The
short-term investment of $3 billion of fiscal year 2000 has more than doubled
the $1.5 billion at the end of fiscal year 1999. Days in accounts receivables went down by two days, this combined
with a four-day increase in accounts payable improves Dells cash conversion
cycle to a negative 18 days in fiscal year 2000 an improvement over the
negative 12 days in fiscal year 1999.
Working capital has increased the
inventory turnover has decreased to 6 days.
This shows that Dell has little chance that capital is wasted with
computers sitting on the shelf in inventory, only to become obsolete. Dell management is constantly aware of
operating expenses and its impact on
revenue and this information is used to maintain the success of the
business.
|
Units |
Measure |
Industry |
Compaq |
2000 |
1999 |
1998 |
1997 |
1996 |
|
Ratio |
Current
Ratio |
1.46 |
1.40 |
1.47 |
1.48 |
1.57 |
1.45 |
1.66 |
|
Ratio |
Acid-test
Ratio |
1.07 |
1.00 |
1.27 |
1.30 |
1.28 |
1.23 |
1.36 |
|
Times |
Accounts
Receivable Turnover |
5.89 |
5.60 |
11.59 |
10.75 |
10.19 |
10.32 |
9.53 |
|
Times
|
Inventory
Turnover |
19.88 |
15.20 |
64.36 |
60.38 |
55.88 |
39.69 |
17.92 |
|
Days |
Days'
Sales in Receivables |
61.12 |
64.29 |
31.06 |
33.50 |
35.32 |
34.88 |
37.79 |
|
Days |
Days'
Sales in Inventory |
18.11 |
23.68 |
5.59 |
5.96 |
6.44 |
9.07 |
20.09 |
|
Days |
Liquidity
Index |
|
|
17.70 |
18.84 |
26.66 |
22.71 |
23.03 |
|
Days |
Days'
Purchases in Accounts Payable |
|
|
69.47 |
63.53 |
61.04 |
61.58 |
61.45 |
|
Days |
Average
Net Trade Cycle |
|
|
-32.81 |
-24.07 |
-19.27 |
-17.63 |
-3.57 |
|
Percent |
Cash
Provided by Operations |
|
|
|
|
|
|
|
|
|
to
Average Current Liabilities |
|
|
71.50% |
88.35% |
76.22% |
73.11% |
104.89% |
Dell’s
short-term liquidity is strong. This is
evident in the above table, which was calculated using Dell’s financial
statements. As you can see, the current
and quick ratios are above both the industry average and Dell’s fiercest
competitor, Compaq. Inventory turnover
is extremely high, and days’ sales in inventory are low. The combination of these factors reflects
Dell’s commitment to its “Direct Model” plan.
Other strengths in this liquidity analysis include Dell’s collection period, which has been improving steadily over time and has reached an outstanding 31 days. It should also be noted that Dell has consistently put its cash from operations to work as a major source of funding. Additionally, the declining liquidity index over these five years implies improved liquidity.
|
Measure |
Industry |
Compaq |
2000 |
1999 |
1998 |
1997 |
1996 |
|
Total
Debt to Equity |
0.73 |
0.11 |
1.39 |
1.16 |
1.96 |
2.30 |
2.37 |
|
Total
Debt Ratio |
0.46 |
0.05 |
0.58 |
0.54 |
0.66 |
0.70 |
0.70 |
|
Current
Liabilities to Total Liabilities |
|
|
0.84 |
0.84 |
0.81 |
0.91 |
0.87 |
|
Earnings
to Fixed Charges |
|
|
40.73 |
41.36 |
55.82 |
92.94 |
33.42 |
|
Cash
Flow to Fixed Charges |
|
|
65.11 |
78.57 |
81.41 |
121.03 |
17.86 |
|
Total
Financial Leverage Ratio |
|
|
2.39 |
2.16 |
2.96 |
3.30 |
3.71 |
|
Financial
Leverage Index |
|
|
2.24 |
2.37 |
3.05 |
3.45 |
2.76 |
|
Altman
Z Score |
|
|
3.62 |
3.47 |
4.10 |
4.39 |
3.98 |
The
table above depicts the ratios as generated from Dell’s financial
statements. Dell’s debt to equity ratio
had been steadily declining, suggesting that Dell was using more equity for
financing than in previous years.
However, in 2000 the debt to equity ratio slightly increased compared to
1999. In this year, the debt to equity
ratio was negatively affected by the market slowdown and the stock’s
decline.
Dell’s
earnings to fixed charges and cash flow ratios indicate that they can fulfill
their debts and are in good shape for their creditors. The total financial leverage ratio depicts
that in 2000 every $1 of common equity commands $2.39 in assets. Also the financial leverage index implies
that Dell is using their debt profitably.
An Altman Z-score of 3.62 is well out of the bankruptcy range.
|
Industry |
Compaq |
2000 |
1999 |
1998 |
1997 |
1996 |
|
|
Sales
to Receivables |
|
|
11.59 |
10.75 |
10.19 |
10.32 |
9.53 |
|
Sales
to Inventories |
|
|
80.63 |
76.10 |
72.11 |
50.94 |
22.82 |
|
Sales
to Working Capital |
|
|
11.73 |
10.98 |
10.97 |
10.70 |
7.36 |
|
Sales
to Fixed Assets |
|
|
36.22 |
39.23 |
42.18 |
42.73 |
37.48 |
|
Sales
to Total Assets |
|
|
2.56 |
2.75 |
3.27 |
3.40 |
3.13 |
|
|
|
|
|
|
|
|
|
|
*Using
average for balance sheet items |
|
|
|
|
|
||
The
above asset utilization table was calculated using Dell’s financial
statements. You’ll notice that sales to
receivables and sales to working capital remain relatively stable throughout the
years. The slightly decreasing trend
among sales to fixed and total assets, can be attributed to the increase in
inventory and receivables as seen later in the current asset turnover ratio. Sales to inventory however has been
gradually improving, which also contributes to the success of Dell’s “Direct
Model” mentioned earlier.
|
Measure |
Compaq |
2000 |
1999 |
1998 |
1997 |
1996 |
|
|
Gross
Profit Margin |
|
|
20.21% |
20.65% |
22.51% |
22.08% |
21.47% |
|
Operating
Profit Margin |
|
|
10.02% |
9.70% |
11.42% |
11.10% |
9.63% |
|
Net
Profit Margin |
7.22% |
|
6.83% |
6.59% |
8.00% |
7.66% |
6.68% |
This
table is based on calculations from Dell’s financial statements. Gross profit margin has been rather steady
throughout the years at about 21%.
Operating profit margin is also rather steady at approximately 10%
throughout these five years. These
measures depict that Dell has maintained firm control over expenses. Dell’s bottom line profit measure, net
profit, has also been relatively constant and is slightly below the industry
average. This industry is particularly
competitive and in order for Dell to provide high quality, made-to-order,
products while maintaining top market share, the result is slightly lower
profit margins.
|
Industry |
Compaq |
2000 |
1999 |
1998 |
1997 |
1996 |
|
|
Return
on Assets |
21.80% |
2.40% |
17.75% |
18.41% |
26.53% |
26.06% |
21.13% |
|
Return
on Common Equity |
63.05% |
4.90% |
39.84% |
43.68% |
80.80% |
89.95% |
58.23% |
|
Financial
Leverage Index |
|
|
2.24 |
2.37 |
3.05 |
3.45 |
2.76 |
|
Equity
Growth Rate |
|
|
39.84% |
43.68% |
80.80% |
89.95% |
58.23% |
|
Disaggregation
of ROCE |
|
|
41.78% |
39.25% |
77.63% |
85.83% |
77.72% |
|
Adjusted
Profit Margin |
|
|
6.83% |
6.59% |
8.00% |
7.66% |
6.68% |
|
Asset
Turnover |
|
|
2.56 |
2.75 |
3.27 |
3.40 |
3.13 |
|
|
|
2.39 |
2.16 |
2.96 |
3.30 |
3.71 |
The
above table depicts return on investment based on calculations performed on
Dell’s financial statements. The return
on assets for Dell is lower than the industry average, yet significantly higher
than Compaq’s. This suggests that Dell
has been operating efficiently, making wise strategic decisions, and has been
utilizing assets effectively.
Additionally the return on common equity and equity growth rate for 1997
and 1998 was extremely high, when the stock price was soaring. In 1999 price leveled off and 2000 led to a
decrease (as noted earlier). Again, the
financial leverage index implies that Dell is using their debt
efficiently.
Disaggregation
of return on common shareholders’ equity adjusts profit margin to reflect
operating and tax-management effectiveness, thus giving us a better picture of
true return on equity. This new figure,
though it lessens that of earlier years, makes Dell look even better in
2000.
RISK FACTORS
Any
business is vulnerable to some type of risk that includes, business, economic and industry
and Dell is no exception. Dell has
however taken precautions to minimize their exposure to risk though they too
acknowledge the possibility is there.
Economic Risk
Economic
risk though expected is by no means completely unavoidable. The federal reserves’ recent lowering of the
interest rate by a quarter percent is indication of an economic slowdown that
started the last quarter of last year and has continued well into 2001.
Alan
Greenspan, chairman of the federal reserve has lowered the interest rate for
the sixth time in the span of a year in an effort to jump start the sluggish
economy however these interest rate cuts have not shown any long term
effect. The slowed spending of
consumers is certainly felt by the computer and technology industry since when
faced with possible recession, such services prove to be income sensitive.
The
natural reaction to the type of economic slowdown that we as consumers are
experiencing is to cut back on spending even more, which ironically only
contributes to an already vicious cycle of layoffs, sluggish consumer spending
which lead to more layoffs. Consumers
are being extra careful about how their income is spent because many fear that
the “worst of the economic downturn may not yet be over.” (Leonhardt, pg.
C1) Further adding to this feeling of
an even more serious impact, are the layoffs materializing not only in the
Computer industry, but also in other areas retail, telecommunications and
manufacturing just to name a few. Dell
has already felt the effects of the economic down turn and has experienced
budget tightening. Compaq recently requested that some 30,000 to 33,000 of its
workers take a mandatory paid week off from July 2- 6. A moved designed to cut costs. Consumers who
fear an economic downturn are less likely to spend on technology upgrades.
Industry Risk
A slowdown in the economy can
cause customers or potential customers to reduce or delay their investments in
computer systems. The question is; if
the economy is sluggish, “how
frequently will consumers seek to upgrade their computers” or even add a second
or third computer to their household. (Semi conductors pg. 2)
Ironically technology allows
companies the ability to react more quickly to the changing demand of their
product. This would appear to be a good trait of technology since companies now
will know sooner that they should discontinue their productivity of new
merchandise and sell some of their “bulging inventories.” Dell Computer’s direct model however,
includes an astonishing inventory turnover period of 6 days which is down from
7 days in 1998. This fact alone causes
some concern for Dell since the company doesn’t have the “bulging inventories”
to fall back on.
Business Risk
Another
concern is the pricing concerns from purchasing raw materials from outside
vendors. Time to time increased expense
results in a decrease in profit margins as in fiscal year 2000 when the
decrease in gross margin was attributed to the increased component costs where
the average revenue per unit decreased by 8%.
The company also purchases a number of components from single source
sometimes because of the high quality that has been consistently produced but
also because at times no alternative sources are readily available. If any of these single sources have an
inventory supply problem Dell could experience delays in shipping.
An inherent risk for any
technology hinges on the nature of the business itself. Dell could also lose revenue if the company
does not continue to produce superior technology at competitive prices. Conversely the influx of advanced
technology from suppliers produce superior components. For example as Intel’s
chips improve, the market place in which Dell sells their wares also increase.
Foreign Currency Translation Risk
Though some
financial currency translation risk exists, Dell has taken precautions of any
substantial loss of capital. However based on foreign currency instruments
outstanding February 2, 2001, Dell estimates a maximum potential one-day loss
in fair value of approximately $21.4 million using a Value-at-Risk (VAR) model.
(Annual Report 2001. Pg 30) The VAR model is an estimation tool used to
estimate risk and doesn’t represent actual loss. The majority of the company’s internationals sales are made using
the U. S. dollar as its functional currency.
Also Dell has entered into foreign exchange currency contracts to hedge
its foreign currency risks. These
hedges are monitored constantly for any substantial change regarding the
hedge’s effectiveness. The risk of loss
is thereby limited to “premium amounts paid for the option contract.” (Dell
Annual Report 2000. pg. 43)
STOCK PERFORMANCE
As of 6/29/01 the 52
week high was 54.67 and the low was 16.25.
At this time the stock is not doing very well because of the faltering
economy. Should the economy pick up I’m
sure Dell’s will bounce back but as long as the economy is bad, unfortunately
the stock reflects what the economy is experiencing.
Dell Computer Corporation is traded
on the NASDAQ under the symbol DELL.
The company’s common stock par value is $.01 per share. As of April 2001, there were 34830 holders
of Dell’s common stock. Dell Computer has never paid cash dividends on common
stock. The company has also undergone
three two-for-one common stock splits one on each of the following dates March
6, 1998, September 4, 1998 and March 5, 1999.
They paid 100% dividend to stockholders of record as of February 27,
1998 August 28, 1998 and February 26,1999.
The Dell Computer Corporation offers
and incentive plan that offers substantially all employees the ability to
purchase company stock through payroll deductions at the end of each
participation period. The purchase price
is equal to 85% of the lower of the fair market value of the common stock at
the beginning or the end of the participation period. Stock issued totaled three million shares in 2000; five million
shares in fiscal year 1999 and nine millions shares in fiscal year 1998.
These diluted shares were reported
separately in the annual report, however, the pro forma effect on basic
earnings per common share was a reduction of $0.17 in 2001, $0.09 in 2000 and
$0.05 in 1999.
CONCLUSION
In
analyzing this company, we feel that investment in this company’s stock would
be advantageous. The fact that the company’s financial structure is strong, and
their expenses are well managed leaves us to believe that Dell Computer
Corporation would be a sound investment.
We were also impressed by the fact that Dell is not just enduring the
slowed economy, but is aggressively promoting their products globally. This attitude gives us confidence in the
Company’s future performance.
References
Germain,
Samuel D. Globalization and its Critics, Perspectives from Political Economy. St. Martins Press, Inc. New
York. 1999.
Kaplan,
David A. The Silicon Boys, and
Their Valley of Dreams. William Morrow and Company Inc. New York. 1999.
Oster, Sharon M. Modern
Competitive Analysis (Third Edition), Oxford University Press, 1999.
The
Reference Press, Fortune Guide to
the 500 Largest U.S. Corporations, 1996.
Wild,
John J., Leopold A. Bernstein, K.R. Subramanyam, Financial Statement
Analysis, Mcgraw-Hill Irwin, 2001.
Woodworth,
Barbara, Workforce Diversity, Fall, 1999.
Dell
Computer Corporation 10-K Report (1996, 1997, 1998, 1999, 2001. 2001)
Leonhardt,
David, Fed Credits a new Economy with
Altering Old Patterns.New York Times, June 26, 2001
Motley
Fool Research, ( www.foolmart.com) Dell Computer Looking to Take
Share in Industry Downturn. February
27, 2001.
Feder,
Barnaby J., Compaq Plans to Phase Out A Widely Used Computer Chip. New York
Times. June 26, 2001.
Bopssong-Martines,
Eileen M. (Editor). Standard &
Poors. Industry Surveys: Semi Conductors. 2000. (www.stockinfo.standardpoor.com).
Stockhouse
International, Company Snapshot. Dell Computer Corporation.
Bloomberg
Personal Finance. Slow + Down. Could it
be Over Before We Know it? April 2001.
Dell.com
http://www.dell.com/us/en/gen/corporate/vision_mission.htm
Mission Statement. (Accessed 6-10-01)
Minter,
Frank, Strategic Finance, Growing
Internationally. (www.strategicfinancemag.com). April 2001.
Pollert,
William R. and Edwin J. Glickman. Strategic Finance, Optimizing Shareowner Value
from Corporate Real Estate Assets. April 2001.
10K Wizard. Complete
Dell 10K Report.
10K Wizard. Financial
Statements. Dell, IBM, Compaq, Hewlett Packard.
AOL
Personal Finance. Company Descriptions.
Dell, IBM, Compaq, Hewlett Packard.
http:/research.web.aol.com/symbol_results.adp?T1=(ticker symbol)&item=5&R1=V!&B1.x=32&B1.y=8
(Accessed on 06/29/01)
Allen
Wan CBS Marketwatch.com @ AOL Personal
Finance. Compaq Asks Workers to Take Week Off.
June 28, 2001.
ht…/story.asp?dist=aolpf&siteid=aolpf&guid.
Marshal
David H. Wayne W. Mcmanus.
Accounting, What the numbers
mean. (Fourth Edition). Irwin Mcgraw-Hill. New York. 1999.
Stav,
Julie. Get Your Share, The
everyday Woman’s Guide to Striking it Rich in the Stock Market. Berkley
Publishing Group. New York, 2000.
Melicher,
Ronald W. and Edgar A. Norton. Norton
Finance”: Introduction to institutions, investments and management. (10th
Edition). South-Western College Publishing, Cincinnati, OH. 2000.
Williams, Stephen.
Newsday Business. The PC is Passe’ At Computer Expo.
June 27, 2001.
CONTENTS
INTRODUCTION---------------------------------------------------------------------------------- 2
INDUSTRY
ANALYSIS --------------------------------------------------------------------------- 2
MANAGEMENT DISCUSSION
AND ANALYSIS------------------------------------------- 3
BUSINESS STRATEGY 3
The Direct Model 3
COMPETITION 5
PRODUCT RESEARCH AND DEVELOPMENT 6
ACQUISITIONS AND EXPANSION 8
GEORGAPHIC DIVERSIFICATION 9
(Globalization)
FINANCIAL ANALYSIS 10
Debt & Investments 11
Investments 12
FINANCIAL ANALYSIS RATIOS 12
Capital Structure and
Solvency 13
Asset Utilization 13
Operating Performance 14
Return on Investment 15
RISK FACTORS 16
Economic, Industry, Business, Foreign Currency 16 -17
STOCK PERFORMANCE 18
CONCLUSION 20
REFERENCES 21