Investors have favored Dell Com-puter Corp for its direct-sales model. Now that demand has slowed and personal-computer makers are in a price war, Dell is proving the value of that approach, said Morgan Stanley analyst Gillian Munson.
Munson raised her rating on Dell shares to "outperform," the firm's second-highest ranking, from "neutral." Dell's shares rose US$0.84 cents to US$26.10.
The company, which is reducing costs to make up for steep price cuts on its PCs, is succeeding at preserving profit margins using its low-cost model, Munson wrote in a report. Even though PC makers face sluggish demand for the next several months, Dell's push to gain market share will pay off even more when demand bounces back next year, she said.
"Now is the time for investors to begin picking away at the shares at these levels," Munson wrote. "We can now see clearer to better margins in [calendar] 2002. We still think that the summer may be slow and that investors should not expect a lot from the summer months."
Since PC demand slumped late last year, analysts and investors have expressed doubt about whether the Austin, Texas-based computer maker could keep cutting prices without reducing profits on a permanent basis. Now, some analysts have started to think the company is taking the right tack. The shares have risen 50 percent this year, making it the best performer in the Standard & Poor's Computer Systems Index. Last year, the stock fell 66 percent.
Dell has announced as many as 5,700 job cuts so far this year.
It racked up 12.8 percent of the world's market share for PC shipments in the first quarter, taking the top position away from Compaq Computer, which has 12.1 percent, according to Dataquest Inc.
"Last quarter's operating margin rose in a tough environment," Munson said in an interview. "I'm impressed. They're an excellent execution company." She raised her estimate for the 2003 fiscal year to US$0.94 a share from US$0.90.
Analyst Joe Moore of Goldman, Sachs & Co on May 23 said Dell is emerging in relatively good shape, leading him to put Dell on the firm's "recommended list" as he picked up coverage of the stock.
Dell was the best performing stock in the S&P 500 Index for the 1990s.
Munson said she's been warming up to Dell's claims that its model is the best in the PC industry. A discussion in the past day with Dell co-president Kevin Rollins convinced her that it was time for an upgrade.
"I didn't hear anything new [from Rollins]. Sometimes you just need to hear it again," she said. "The last piece of the story was in sitting down and walking through the strategy with management. That helped me get more confident."
Munson accurately predicted in April that Dell would fire more workers because the company wasn't lean enough. A few weeks later, Dell said it would eliminate 3,000 to 4,000 jobs.
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