Dell and cost cutting
I’d first like to start by saying that any company that can improve the bottom-line by means of cutting costs is a great company indeed. Sure we like to see a company with increased market share and revenue, but cost cutting is a great way to increase profits and show that the company is concerned about waste. There are millions of companies out there that are extremely profitable and would only be more profitable by decreasing expenses. When a company starts to look inside its offices to cut expenses, we’re all happy investors.
Dell has done just that. Recently they’ve announced a plan to cut $3 Billion in costs over the course of three years by closing down an Austin, Texas computer manufacturing center and job cuts at call centers. The cost cutting is expected to start in 2009 and continue through 2011. The $3 Billion can be further directed to more advertising and building up its core business of supplying the business computer niche.
Businesses account for over 50% of Dells revenue with the other half made up of mostly direct-consumer sales. The slowdown of activity in corporate spending has hurt Dell as business try to make the most out of old machines. Dell’s increasing look at its own balance sheets can direct further savings to consumers and help Dell to gain marketshare by producing more inexpensive machines.
Other than its particularly good news in cost cutting, Dell is trading at ten year lows. Dell boomed to $60 per share during the internet boom but were quick to bust during the 01-02 tech fallout. Since then Dell has traded from $20-40 per share while producing consistent profits. At these lows, Dell looks like an absolute bargain. The company’s stock sits at a critical $20 per share support level which it is unlikely to break.
I see this company moving to $25 per share with ease. Selling pressure persists at about $27-28 per share but the fundamentals look very strong. If the cost cuts account for an additional $1 Billion a year in profit, Dell is seriously undervalued. The company currently turns a profit of $3 Billion per year, a further increase of $1Billion would put Dell at a PE ratio of 10. That’s very low for a company such as this.
