Dell Stock Analysis

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Date: October 21, 2008 From: Team B5 (Chiu, S., Droessler, M,. Hsu, M., Nagase, Y., Page, C., and Werber, R.) To: Randolph Westerfield Re: Dell Stock Analysis Due to concerns regarding decreasing margins, increasing losses in their credit business, and lower demand for PCs as a result of the current weakness in the US economy, we are issuing a ‘hold ‘ rating for Dell, Inc. Dell is striving to maintain consistent revenue growth in its core verticals, and increase sales growth. While Dell has been successful increasing their overall revenues despite a slowdown in PC demand in certain US and European markets, the gains have been undermined by decreasing operating and net income margins, which has hurt their profitability. Additionally, Dell is facing challenges as they adapt their business model of JIT production, which relied mainly on direct sales to customers, to the current market which is requiring them to produce more units in advance of sales. From a relative performance perspective, as evidenced in Appendix D, Dell is underperforming peers in their sector across many metrics. This is a result of many of their competitors having successfully made cost-cutting and stream lining measures in response to the current environment, while Dell has largely not delivered on their promise of $3B in operational savings. While actions have been taken to cut costs and improve margins, little benefit has been realized from this plan as evidenced in Appendix E’s graphs showing Dell’s unstable, decreasing margins versus their competitors. Additionally, net credit losses for the three months ended August 1, 2008 and August 3, 2007 were $19M and $10M, respectively. These amounts represented annualized credit losses of 5.7% and 2.8% of the average outstanding customer receivables. These increasing losses will put further pressure on Dell’s net margins. From a

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