For the first time in a long time, a group of analysts actually used some common sense by standing up for Dell Computer Corp. (Nasdaq: DELL) even though it warned that it would miss fourth-quarter profit estimates by 5 cents a share.
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If you haven't passed out yet, take a moment to salute Merrill Lynch's Steve Fortuna, Chase H&Q's Walter Winnitzki, Robertson Stephens' Dan Niles and Piper Jaffray's Ashok Kumar for having the guts to upgrade Dell following the profit warning.
They dared to upgrade a company that's going to grow revenue by between 33 percent to 38 percent in fiscal 2000. And that's after growing sales by more than 40 percent in fiscal 1999.
This is what analysts are supposed to do. Instead of reacting to unfavorable news with the predictable slash-and-bash research notes, these guys looked beyond the immediate issues to give their clients some perspective.
How strange is it that analysts are now receiving praise for upgrading a company such as Dell, with that kind of growth, at around $40 a share?
By some stroke of luck, Dell shares only trimmed about $1.75 a share in the aftermath Thursday.
I say "only" because Dell's infamous for beating analysts' estimates quarter after quarter only to see its shares tumble the following day. Dell apparently was due some slack.
As far as profit warnings go, this latest trouble from Dell was actually tinged with a silver lining. The bad news is chip components were hard to find and the Y2K recovery didn't happen as quickly as Dell anticipated in the business market.
The good news: Demand is strong, new models are flying off shelves and, most important, there's this little software upgrade coming from Redmond in about a month that's going to send consumers scurrying to their local electronics retailer for an upgrade.
Looking at the numbers
Dell now says it will likely post a profit of $430 million, or 16 cents a share, on sales of $6.7 billion, well below the consensus estimate of 21 cents a share in the quarter.
CFO Tom Meredith said Dell couldn't deliver Coppermine products -- the latest version of Pentium III chip on 0.18 micron with integrated L2 cache -- in volume after introducing them.
This problem's not unique to Dell. It's no secret that Intel's having difficulty cranking out the chips to meet the ravenous demand. As by-product of this heavy demand, Advanced Micro Devices Inc.'s (NYSE: AMD) shares have been revived and all the box makers are looking for alternative sources for chips.
"The problems persisted throughout the quarter," Meredith said. "We believe most of the issues have been resolved for the first quarter, but it came too late to help the fourth quarter."
While its fourth quarter sales will be roughly flat with the $6.78 billion it did in the third quarter, total sales in fiscal 2000 should jump to around $34 billion. It will likely earn around 90 cents a share in the fiscal year and the stock's trading off 31 percent from its 52-week high set in February.
This wasn't a surprise
Dell's profit warning might have been the most loosely held secret on Wall Street this week. While it's important to credit the analysts for sticking to their guns, they had plenty of time to prepare for the inevitable.
Merrill Lynch's Fortuna, who predicted this announcement a couple of weeks ago, upgraded the stock from a near-term "neutral" rating to a near-term "buy."
In a conference call Wednesday, founder and CEO Michael Dell admitted the profit warning was the company's most pronounced foray into the wink-and-nod expectations game these companies continue to play with Wall Street.
"Clearly we're trying to calibrate expectations and get more leeway to manage through these turbulent times," Dell said.
Deutsche Banc Alex Brown's Phillip Rueppel and SG Cowen's Richard Chu apparently weren't impressed as both downgraded the stock from "strong buy" ratings to "buys."
Robertson Stephens analyst Dan Niles bumped the stock from a long-term "attractive" rating to "buy" and set a 12-month price target of $50 a share.
"As we stated in a prior report, once expectations were reset, we would become more bullish based on a rebound in corporate demand and demand generated by the Windows 2000 launch," Niles said in a research note.
Piper Jaffray's Ashok Kumar said despite the warning, he expects sales to improve 38 percent in fiscal 2000.
In a research note aptly titled "An Ounce Of Reality Is Better Than A Pound Of Fantasy," Kumar points out that Dell's online transactions account for 45 percent of its total sales and its business-to-business sales represent 15 percent of sales.
"Resetting expectations is not indicative of weakening fundamentals or a deteriorating macro environment, but positions the company to post meaningful upside come hell or high water," Kumar said in a research report.
Trading below $40 a share, investors may look back in six or nine months and wonder why they didn't buy more.
Even if Dell shares remain flat through the year, you have to admire analysts who upgrade a stock in its darkest hour.