Net Profit Plummets at Dell, Brings Analyst Price Target Cuts With It

Andrew Klips |

Michael Dell

Dell, Inc. (DELL) reported a 47 percent drop in profit after Thursday’s closing bell as the third largest PC maker in the world was struck by weak macro-economic conditions and fleeting demand for PC’s and laptops in general.

Net profit during the third quarter for Dell totaled $475 million, or 27 cents per share, as sales on PC units fell 8 percent and laptops sales slumped 26 percent compared to the year prior. Net profit during Q3 of 2011 was about $890 million. Revenue during the third quarter was down 11 percent to $13.72 billion versus $15.36 billion in last year’s third quarter.

Adjusted earnings for the quarter were 39 cents per share. Analysts were expecting earnings of 40 cents per share and revenue of $13.9 billion.

Sales shortfalls were broad with revenue in the America’s dropping 9 percent, Japan and the Asia-Pacific region down 11 percent and Europe, West Asia and Africa sales tumbling 15 percent. Sales in desktop computers and laptops, which generate about 50 percent of total revenue for Dell, declined by 19 percent to $6.65 billion in the third quarter.

Dell did get a lift in sales of it server and networking equipment offerings, a business model shift that the company has been trying diligently to make happen with overall trends moving towards mobile products like tablets and smartphones. Sales in that revenue stream increased 11 percent from Q3 2011 to $2.32 billion. Sales for large cloud computing applications rose by 126 percent.

The Round Rock, Texas-based company is expecting fourth quarter revenue between $14 billion and $14.4 billion; below Wall Street estimates of $14.5 billion. In Q4 2011, Dell posted $16 billion in revenue.

Analyst views on Dell are mixed. Brian White from Topeka Capital Markets sees limited downside from these price points and calls Dell a buy. Brean Murray reissued a buy rating on Dell on Monday with an $11 price target. However, JP Morgan analyst Mark Moskowitz sees shakiness in PC sales and cut his price target on Dell from $16.50 to $14.50. Ben Reitzes at Barclays Capital shaved $1 from his target for Dell to $10, citing concerns about Dell’s shift towards enterprise solutions. Raymond James and Baird also cut price targets from $16 to $14 and from $14 to $11, respectively.

Analysts at Cowen reaffirmed their neutral rating on Dell on Thursday.

On the heels of its disappointing earnings release on Thursday, Dell said Friday morning that it would pay an undisclosed amount of money to acquire Gale Technologies, a Santa Clara, California-based provider of infrastructure automation solutions. Dell is forming a new division called Enterprise Systems & Solutions that will strengthen Dell’s enterprise solutions initiatives.

Shares of DELL headed south in early trading Friday, trading just above four-year lows around $9 per share. The stock has lost about 38 percent of its value in 2012.

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