Has Dell Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Dell fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Dell.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Growth | 5-year annual revenue growth > 15% | (1.4%) | Fail |
1-year revenue growth > 12% | (8.3%) | Fail | |
Margins | Gross margin > 35% | 21.5% | Fail |
Net margin > 15% | 4.2% | Fail | |
Balance sheet | Debt to equity < 50% | 84.9% | Fail |
Current ratio > 1.3 | 1.19 | Fail | |
Opportunities | Return on equity > 15% | 24.2% | Pass |
Valuation | Normalized P/E < 20 | 13.82 | Pass |
Dividends | Current yield > 2% | 2.3% | Pass |
5-year dividend growth > 10% | NM | NM | |
Total score | 3 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Dell paid its first dividend in September 2012. Total score = number of passes.
Since we looked at Dell last year, the company hasn't been able to regain the point it lost from 2011 to 2012, despite paying a lucrative dividend for the first time last fall. The stock has also suffered, losing nearly 20% over the past year.
Dell's falling revenue clearly shows the troubles that the PC industry has gone through in recent years. As mobile devices become more popular, Dell has slowly seen the PC end of its business become more commoditized, leading to razor-thin margins that hold back profits. Hewlett-Packard has faced many of the same struggles, but it has been more aggressive about seeking out higher-margin areas beyond the PC in an effort to boost overall profitability. For Dell's part, it's trying to implement a similar strategy, but despite a 42% increase in networking sales in its most recent quarter, it hasn't had a huge impact on margins yet.
Lately, most of the discussion around Dell has been on the proposed going-private transaction from founder Michael Dell and private-equity firm Silver Lake Partners. Some investors, including activist Carl Icahn, believe that the proposed $13.65 per share price for the buyout is far too low. Icahn has proposed an alternative that would involve a leveraged recapitalization, borrowing in order to finance $9 per share special dividend, and then keeping the company public.
Regardless of whether Dell remains public or private, one thing that's clear is that Microsoft believes it's essential to keep the PC-maker running. With the private-equity deal bankrolled in part by a $2 billion loan from Microsoft, the software giant sees the writing on the wall for a big chunk of Windows business if Dell exits the PC business entirely.
For Dell to improve, taking on more leverage is really the last thing it needs. Getting sales moving in the right direction will require innovative new products, and the company doesn't have much time to deliver. Without a radical transformation, Dell won't get far toward perfection anytime soon.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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The article Has Dell Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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