Running The Numbers – Dell ($DELL) Has Fallen Too Far
Since late August $DELL has been hammered. The share price has dropped from US$25.63 on 27 August to US$15.25 on Friday – a 40% drop in just over five-weeks. In that five-week period $DELL did suffered a disappointing profit result, cautioned of global slumping demand and seen significant turmoil on global financial markets. The turmoil in the financial markets has seen technology stocks hard hit – including $DELL. But a 40% drop in five-weeks is substantial. Is it time to start buying $DELL? We decided to have a look with the Valuecruncher interactive tool.
Valuecruncher produces a valuation of US$19.24 for $DELL. This is a current valuation not a target price. This valuation is 26.2% above the current share price of US$15.25.
Our assumptions are revenues of US$65.0 billion in 2009 growing to US$70.0 billion in 2011. We have used a flat EBITDA margin of 6.5% to 2010 and then 7% in 2011. Our terminal growth rate is 3.0%. We used a terminal capital expenditure number of US$800 million. Our WACC (discount rate) is 12.0%. All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation. Our analysis incorporates the cash and debt on the $DELL balance sheet – Valuecruncher calculates a net debt number.
We believe that our assumptions are reasonably conservative. The near-term revenues and profitability are very achievable. The terminal growth rate is about the US economic long-term growth rate. The discount rate of 12% is reasonably high reflecting the uncertainty around $DELL.
Based on our analysis and assumptions the current share price looks cheap. The intrinsic value of $DELL looks well above the current share price. Play with our assumptions – what does your analysis say?