Financial Analysis and Forecasting
Professor Carlos Vecino
E14 - Team 91
Case: Dell
Dell suffered a dramatic fall in its stock price during the year 2000.
The fall in stock price was generated by internal poor performance or was it a general industry crisis?
Presenter: Anya Grant XU OLIVEIRA ZHENG O’CONNELL
HEC Montreal – Team 91 – December 3rd, 2003
Agenda
Overview of the IT Industry in 2000
Overview of the PC Industry in 2000
Dell and Industry Ratios
Observations and evaluations of Dell’s Performance and Stock Price
Notes
Questions
IT Industry PC Industry Observations NotesDell and Industry AnalysisHome
HEC Montreal – Team 91 – December 3rd, 2003
Overview of the IT industry 2000
US faced it’s most controversial election in 2000 bringing political instability to the an already weakening economy. This exacerbated IT industry problems.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Overview of the IT industry 2000
“Wall Street: Is the party over?” is stated in the Business Week Cover in April, 17th, 2000.
Time Europe “A Market Fit to Burst”
The IT Industry was facing a general scenario of caution by investors and the
IT companies’ stock values began to fall dramatically.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Overview of the IT industry 2000
The Nasdaq Index experienced tremendous growth in September,
1999, but started to fall, “coming back to earth” (Business Week April 2000).
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Overview of the IT industry 2000
The TOP 10 fall records in the Nasdaq history happened in the year 2000.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Overview of PC Industry and the Economy US quarterly GDP saw slow growth in Q4 of 2000 and negative growth in
Q1 2001. Most economists predicting first recession since early 90’s.
Reduced tech spending among major US firms will have a negative
impact on sales. “Especially hard-hit in these purchasing trims: PCs … that don't provide much profit bang for the buck.” (Business Week, Dec. 18, 2000)
The falloff in corporate IT spending has spread worldwide, too, coming
home to roost among American suppliers. In Europe, slow adoption of Microsoft Corp.'s new Windows 2000 software has pulled down corporate PC sales by over 20% this year. That slammed the earnings of … Dell Computer Corp., which had counted on the European market for a sales boost.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and PC Industry Analysis
Dell’s Performance Highlights
Common Size comparisons
Base Year Comparisons
Liquidity Ratios
Efficiency Ratios
Financial Leverage
Profitability Ratios
ROE Decomposition
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell’s Performance Highlights
Dell revenues increased 26% in 2000 over 1999.
EBITDA increased 20%
The EBITDA as a proportion of revenues decreased by 7% in 2000 in comparison with the same proportion in 1999.
The net income increased 31% in 2000
Analyzing the Common Size combined with the Common Base Year, net profit as percentage of sales increased 4%.
Total current assets increased by 24% in 2000 over 1999 and total current liabilities increased 26% in the same period.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Common Size Comparison Highlights
Industry average of inventory as a percentage of total assets is 9,6%.
Dell carries inventory valued at 2,9% of its total assets.
The industry average for COGS as a percentage of revenues is 72%.Dell has COGS as 80% of its revenues.
The industry selling expenses average represents 14% of the revenues.
For Dell, this represents only 10% of revenues.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Common Size Comparisons
The current assets of Dell represents 70.64% of its total assets.
The industry current assets over total
assets average is 58.35%. In 2000, Cash and Securities represent
40.5% of total assets vs. competitor’s average of 10.3%.
We can assume that Dell has less proportion of assets as fixed costs than the average of its competitors.
Current Assets
58.35%
70.64%
42%
29%
IND. AVG Dell
% of Current Assets and Other Assets
Current Assets
Other AssetsOther Assets
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Common Base Year Comparisons
In 2000, Dell’s cash increased 32% over 1999, industry average dropped 35% ;
Dell’s inventory increased 2%; industry average increased by 22%;
Dell’s net income increased 31%; industry average dropped 8%;
Dell’s EPS increased 27%; the industry average dropped 8%;
Dell’s net cash provided by operating activities increased 7%; industry average dropped 31%.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Liquidity
In 2000, Dell’s current ratio was
7% better than the average of it’s competitors.
HP had a result 6% better than Dell in 2000.
Dell had a current ratio
20% better than IBMin 2000.
1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Liquidity
In 2000, Dell improved its results by 11% in Cash plus securities over its total assets from 1999.
All major competitors saw their ratios decline in 2000.
This ratio is 290% better than the average.
1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Efficiency
At the end of 2000, Dell held 5.74 days of inventory vs 7.12 in 1999.
The average industry result for this ratio was 32.58 days.
Dell achieved a result 82,4% better than the industry average, which means approximately 26 days of better efficiency managing the inventory. 1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Efficiency
Dell achieved in 2000 a financing period of -23 days.
This result is 82 days better than the average of industry of +59 days
1999 2000 1999 2000
DELL
IND. AVG
IBM
GATEWAY
HP
COMPAQ
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Financial Leverage
Dell’s Debt over EBITDA is 56% lower than the average for the industry.
1999 2000 1999 2000
Total Debt over EBITDA
17.25
90.16
23.94
4.76
39.62
20.71
69.7
9.64
0
39.67
DELL
IBM
HP
COMPAQ
IND.AVG.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell and Industry Financial Leverage
Dell is able to pay 58 times its interests.
The average industry is able
to pay 13.6 times its interests.
1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell’s Profitability
In 2000, Dell achieved a
return on assets of 16,2%.
This performance was
130% better than the industry average and up 6.7% from 1999.
Return on Assets
2%
10%11%
9%
15%
8%
2%
11%
6%
9%
16%
7%
COMPAQ HP GATEWAY IBM DELL AVERAGE
1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell’s Profitability
In 2000, Dell achieved a
return on common equity of 39%, up 26% from 1999.
This performance was
96.5% better than the industry average in 2000.
IBM achieved a return on equity of 38%.
Return on Common Equity
4%
19%21%
40%
31%
21%
5%
26%
10%
38% 39%
20%
COMPAQ HP GATEWAY IBM DELL AVERAGE
1999 2000 1999 2000
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Dell – ROE Decomposition
The Du Pont Identity
ROE = Net income/Sales * Sales/Total asset * (1+Debt/Equity ratio)
= Profit margin * Total asset turnover * Equity multiplier
= Operating efficiency * Asset use efficiency * Financial Leverage
ROE Profit Margin Total asset turnover Equity multiplier
Dell 1999 31.39% 6.59% 2.20 2.16
Ind. Avg. 1999 20.40% 5.82% 1.47 2.50
Dell 2000 38.72% 6.83% 2.37 2.39
Ind. Avg. 2000 20.00% 5.14% 1.61 2.62
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Market to Book Ratio
24.37
9.51
11.21
4.91
3.09
8.04
7.27
2.43
4.4
2.12
DELL
IBM
GATEWAY
HP
COMPAQ
1999 2000 1999 2000
Dell achieved in 2000 a market to book ratio of 8.04.
The average for the industry in 2000 was 4.05.
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Stock Price Comparison (Jan 1,1996 to Jan 1, 2001)
DELL had its stocks price declining from US$ 51 in
1999 to US$16 in 2000. Drop 70%.
Gateway stocks price dropped 75% in the same period, from US$72 to US$18.
IBM stocks price declinedonly 21% and HP 29%
85
108
32
45
18
72
51
1627
15
1996 1997 1998 1999 2000 2001
DELL
Gateway
IBM
Compaq
HP
1999 2000 Dif. %IBM 108 85 -21%HP 45 32 -29%
COMPAQ 27 15 -44%GATEWAY 72 18 -75%
DELL 51 16 -69%
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Summary State of Competitive Advantages:
– COST LEADERSHIP + Direct Marketing :• Liquidity:
– Cash on hand increased 32% and Cash/Assets is 290% above industry;– Low fixed assets: Less than 30% of total assets (vs 42% industry average);
• Efficiency:– Low Inventories: Turnover of 5.7 days vs industry average of 32.6 days;– Cash-to-Cash: 82 days faster than industry average;
• Financial Leverage:– No short-term debt, and long-term debt: Interest charge coverage 425% above industry average;
• Profitability:– ROA: 130% above industry average;– Return on common equity : 39% --------- 96.5% higher than industry average and equivalent to IBM;
Results support benefits of current Direct Model strategy
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Observations and Evaluation – Stock Price
RISE:– 5600% increase in share value over 4 years based on a combination of very favourable market conditions and
forecasts in mid to late 90’s and the successful implementation of the Direct Model Marketing strategy which gives Dell a clear, sustainable competitive advantage over competition in PC Industry;
FALL:– Penetration rates into homes reached 50% in 2000 and e-commerce transactions were much lower
than 90’s forecasts;– Sales growth in developed countries (America, Europe) down substantially;– Industry-wide shock punctuated by DOT.COM bubble burst;
Market Reaction:– Market re-evaluation of tech stocks, including DELL, on the heels of a major burst and on the toes of a pending recession;– Given going market conditions, investors may have perceived DELL’s focus on PC’s as “riskier” in comparison to more
diversified companies such as IBM and HP and stock value was adjusted accordingly; Observations:
– All ratios are consistent with business strategy and competitive advantage and are proof that DELL’s strategy works.
IF IT AIN’T BROKE, DON’T FIX IT!!!!!
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Only one suggestion to the board to reduce slide of stock price:
– Dell have a final cash position of 5.4 billion.
– Different uses of cash to increase returns;
– By distributing more dividends, instead of having this final cash, Dell could perhaps have reduced the drop in its stock price.
Observations and Evaluation – Stock Price
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
HEC Montreal – Team 91 – December 3rd, 2003
Notes
This presentation and the corresponding excel graphs and analysis are available for students at:
http://ca.briefcase.yahoo.com/
Yahoo ID: hecdell
Password: team91
IT Industry PC Industry NotesDell and Industry AnalysisHome Observations
Questions ?
MBA 2003-2004TEAM 91
Financial Analysis and Forecasting
Professor Carlos Vecino
E14 - Team 91
Case: Dell – Second Part
HEC Montreal – Team 91 – December 3rd, 2003
Dell’s strengths and possible weaknesses
Strengths: low cost, high efficiency– Lower inventory – from 3.4% of assets to 2% in 2002
– Increase receivable turnover – growth of 41% from 2002 over 1999
– Decrease payable turnover
Possible weaknesses
– Decrease liquidity by reducing its current assets.
Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash
HEC Montreal – Team 91 – December 3rd, 2003
Short Term Solvency Ratios
Reduced Cash position
Improved Inventory Turnover Reducing Current Assets
Short Term Solvency
1.45
0.47
1.001.05
1.48
1.401.39
1.01 0.960.73 0.75
0.48
2000 2001 2002 2003
Current Ratio -32%Quick Ratio -31%Cash Ratio -35%
Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash
HEC Montreal – Team 91 – December 3rd, 2003
Main Uses of Cash -1999 to 2002
Dell increased investments 94%. In 1999 it was 23.7% of total assets and in 2002 investments represented 34% of total assets.
Dell bought back treasury stocks, reducing total equity from 46.3% of total liabilities + equities in 1999 to 31.5% in 2002.
Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash
HEC Montreal – Team 91 – December 3rd, 2003
Du Pont Analysis of Dell
Equity Multiplier increased as a result of:
Assets increased 35% from 2002 to 1999
Total equity decreased 8%in the same period
Return on Equity increased as a result of:
Dell’s Net Income increased 27%
Total equity decreased 8%in the same period
1999 2000 2001 2002 Dif 02/99
Profit margin 6.60% 6.80% 4.00% 6.00% -9%
Total asset turnover 2.2 2.37 2.3 2.29 4%
Equity multiplier 2.16 2.39 2.88 3.17 47%
ROA 14.50% 16.20% 9.20% 13.70% -6%
ROE 31.40% 38.70% 26.50% 43.60% 39%
Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash
HEC Montreal – Team 91 – December 3rd, 2003
Comparison Dell and Competitors (Du Pont Analysis, 2002)
The strong competitive advantage of Dell is still evident
The highest Profitability The highest Efficiency The highest ROA and ROE
Profit Total Asset Equity Margin Turnover Multiplier ROA ROE
Dell 6.00% 2.29 3.17 13.70% 43.60%
Ind. Average -1.43% 1.10 2.86 -3.17% -5.10%
IBM 4.40% 0.84 4.24 3.70% 15.70%
HP -1.60% 0.8 1.95 -1.30% -2.50%
Gateway -7.10% 1.66 2.4 -11.90% -28.50%
Strengths & Weaknesses Solvency Ratios Dell Du Pont AnalysisHome ConclusionMain Uses of Cash
Questions ?
MBA 2003-2004TEAM 91