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 valuation model of $DELL with interactive assumptions

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.

Assumptions

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?

Disclosure: None

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Dell Inc (Dell) beat analyst forecasts this week on the back of stronger than expected notebook sales and a lower cost-base. This has the company claiming that its turnaround plans are progressing well.

At Valuecruncher we decided to analyse what the improved performance means for the share price. We have used the Valuecruncher interactive tool for analysing the company. That means that anyone can follow the below links and amend our valuation – if you want to see the impact of our assumptions you can.

Valuing Dell

Our assumptions are revenues of US$65.5 billion in 2009 growing to US$75.0 billion in 2011. We have used an EBITDA margin of 7% in 2009 rising to 7.5% in 2010 and 2011. We have used a terminal growth rate of 4.0%. We calculated that using a present value calculation with the growth rate dropping from 7.5% in 2012 to 3.5% in 2016. We used a terminal capital expenditure number of US$900 million. We have used a WACC (discount rate) of 11.5%.

Valuecruncher Valuation Dell Inc.

Our analysis gives a share price of $23.94 which is approximately 4% above the current share price of $23.06.

Summary

The results released this week are a promising initial start on Dell’s turnaround plan. Dell shares closed on May 21 at $20.01 and have risen 15% to $23.06 by May 30. Our analysis suggests there is slightly more value available in the current share price - but only a small amount. The information released this week appears to have been efficiently absorbed into the share price. Play with our assumptions - what does your analysis say?