1. Financial Analysis and Forecasting Professor Carlos Vecino E14 - Team 91 Case: Dell

2. 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

3. HEC Montreal – Team 91 – December 3 rd, 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 IndustryObservationsNotesDell and Industry AnalysisHome

4. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

5. HEC Montreal – Team 91 – December 3 rd, 2003 Overview of the IT industry 2000  “ Wall Street: Is the party over?” is stated in the Business Week Cover in April, 17 th, 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 IndustryNotesDell and Industry AnalysisHomeObservations

6. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

7. HEC Montreal – Team 91 – December 3 rd, 2003 Overview of the IT industry 2000  The TOP 10 fall records in the Nasdaq history happened in the year 2000. IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

8. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

9. HEC Montreal – Team 91 – December 3 rd, 2003 Dell and PC Industry Analysis  Dell’s Performance Highlights Dell’s Performance Highlights  Common Size comparisons Common Size comparisons  Base Year Comparisons Base Year Comparisons  Liquidity Ratios Liquidity Ratios  Efficiency Ratios Efficiency Ratios  Financial Leverage Financial Leverage  Profitability Ratios Profitability Ratios  ROE Decomposition ROE Decomposition IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

10. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

11. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

12. HEC Montreal – Team 91 – December 3 rd, 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 % of Current Assets and Other Assets Current Assets Other Assets IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

13. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

14. HEC Montreal – Team 91 – December 3 rd, 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 IBM in 2000. 1999 2000 1999 2000 IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

15. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

16. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

17. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

18. HEC Montreal – Team 91 – December 3 rd, 2003 Dell and Industry Financial Leverage  Dell’s Debt over EBITDA is 56% lower than the average for the industry. 1999 2000 1999 2000 IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

19. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

20. HEC Montreal – Team 91 – December 3 rd, 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. 1999 2000 1999 2000 IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

21. HEC Montreal – Team 91 – December 3 rd, 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%. 1999 2000 1999 2000 IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

22. HEC Montreal – Team 91 – December 3 rd, 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 ROEProfit MarginTotal asset turnoverEquity multiplier Dell 199931.39%6.59%2.202.16 Ind. Avg. 199920.40%5.82%1.472.50 Dell 200038.72%6.83%2.372.39 Ind. Avg. 200020.00%5.14%1.612.62 IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

23. HEC Montreal – Team 91 – December 3 rd, 2003 Market to Book Ratio 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 IndustryNotesDell and Industry AnalysisHomeObservations

24. HEC Montreal – Team 91 – December 3 rd, 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 declined only 21% and HP 29% DELL Gateway IBM Compaq HP IT Industry PC IndustryNotesDell and Industry AnalysisHomeObservations

25. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

26. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

27. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

28. HEC Montreal – Team 91 – December 3 rd, 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 IndustryNotesDell and Industry AnalysisHomeObservations

29. Questions ? MBA 2003-2004 TEAM 91

30. Financial Analysis and Forecasting Professor Carlos Vecino E14 - Team 91 Case: Dell – Second Part

31. HEC Montreal – Team 91 – December 3 rd, 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 RatiosDell Du Pont AnalysisHomeConclusion Main Uses of Cash

32. HEC Montreal – Team 91 – December 3 rd, 2003 Short Term Solvency Ratios  Reduced Cash position  Improved Inventory Turnover  Reducing Current Assets Current Ratio -32% Quick Ratio -31% Cash Ratio -35% Strengths & Weaknesses Solvency RatiosDell Du Pont AnalysisHomeConclusion Main Uses of Cash

33. HEC Montreal – Team 91 – December 3 rd, 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 RatiosDell Du Pont AnalysisHomeConclusion Main Uses of Cash

34. HEC Montreal – Team 91 – December 3 rd, 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 Strengths & Weaknesses Solvency RatiosDell Du Pont AnalysisHomeConclusion Main Uses of Cash

35. HEC Montreal – Team 91 – December 3 rd, 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 Strengths & Weaknesses Solvency RatiosDell Du Pont AnalysisHomeConclusion Main Uses of Cash

36. Questions ? MBA 2003-2004 TEAM 91