pc industry presented by daniel cheung, kai li xiaotao wang, xiang ren
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PC Industry
Presented by
Daniel Cheung, Kai Li
Xiaotao Wang, Xiang Ren
The Players
Dell HP / Compaq Apple Gateway / eMachine Others
Market Shares
Q3 2005 World PC Shipments
18%
16%
8%5%4%
49%
Dell
HP
Lenovo
Acer
Fuitjitsu
Others
PC Sales by Region
0
10
20
30
40
50
60
70
Million Units
2001 2002 2003 2004 2005
USAWorldwide
Industry Performance
NASDAQ Computer Index (IXCO)
Price Performance – 1 Year
Factors Affecting PC Industry
Profit margin and parts cost Upgrading cycle Overall economical condition Oversea markets
Industry Trends
Decline in desktop sales Increase in mobile computing due to increase
in wireless connectivity (25% worldwide and 30% in US)
Shifting toward digital home theater Maturing of PC market
Business Model
Direct sales- Just In Time model, low inventory, direct to customer by phone & internet, lower cost and price
Resellers- Retail stores such as Future Shop, require inventory, higher cost and price
PC Brands VS Whitebox
What is Whitebox?- no name brand PC assemble by independent shops
- used by more advance customers who like to customize individual parts
- usually have less services compared to branded PC
Reaction from PC giants?- Dell’s XPS series, try to target gamers
HP HistoryHP History
Founded in 1939 by William R.Hewlett and David Founded in 1939 by William R.Hewlett and David Packard.Packard.
Incorporated in 1947 under the laws of the State of Incorporated in 1947 under the laws of the State of California.California.
Changed the state of incorporation from California Changed the state of incorporation from California to Delaware in 1998.to Delaware in 1998.
Business Segment InformationBusiness Segment Information
The Personal Systems Group (PSG)The Personal Systems Group (PSG) The Imaging and Printing Group (IPG)The Imaging and Printing Group (IPG) Enterprise Storage and servers (ESS)Enterprise Storage and servers (ESS) HP Services (HPS)HP Services (HPS) HP Financial Services (HPFS)HP Financial Services (HPFS) Software Software Corporate InvestmentsCorporate Investments
Personal Systems GroupPersonal Systems Group
One of the leading vendors of personal computer One of the leading vendors of personal computer in the world based on unit volume shipped and in the world based on unit volume shipped and annual revenue.annual revenue.
Provides commercial PCs, consumer PCs, Provides commercial PCs, consumer PCs, workstations, handheld computing devices, digital workstations, handheld computing devices, digital entertainment systems, calculators and other entertainment systems, calculators and other related accessories.related accessories.
Imaging and Printing GroupImaging and Printing Group
The leading imaging and printing systems provider The leading imaging and printing systems provider in the world for printer hardware, printing supplies in the world for printer hardware, printing supplies and scanning device.and scanning device.
IPG's products can be categorized as home and IPG's products can be categorized as home and business printing, imaging and publishing devices business printing, imaging and publishing devices and systems, digital imaging products and printer and systems, digital imaging products and printer supplies.supplies.
Enterprise Storage and ServersEnterprise Storage and Servers
Business Critical ServersBusiness Critical Servers
Industry Standard ServersIndustry Standard Servers
StorageStorage
HP Financial ServicesHP Financial Services
supports and enhances HP's global product and supports and enhances HP's global product and service solutions.service solutions.
provides a broad range of value-added financial provides a broad range of value-added financial life cycle management services.life cycle management services.
Offers leasing, financing, utility programs and Offers leasing, financing, utility programs and asset recovery services, and financial asset asset recovery services, and financial asset management services for large global and management services for large global and enterprises customer.enterprises customer.
HP ServicesHP Services
Technology ServicesTechnology Services– provide product warranty support.provide product warranty support.
Consulting and IntegrationConsulting and Integration– help customers measure, assess and maintain the link between help customers measure, assess and maintain the link between
business and IT.business and IT.
– Align, extend and manage customer’s applications and business Align, extend and manage customer’s applications and business processes.processes.
Managed ServicesManaged Services– offer IT management services, such as client computing managed offer IT management services, such as client computing managed
services and managed web service.services and managed web service.
SoftwareSoftware
Provides management software solutionProvides management software solution
delivers a suite of comprehensive, carrier-grade delivers a suite of comprehensive, carrier-grade platforms for developing and deploying next-platforms for developing and deploying next-generation voice, data and converged servicesgeneration voice, data and converged services
Focus on extending network-management Focus on extending network-management software into application and business process software into application and business process management.management.
Summary of RevenueSummary of Revenue
Revenue CompositionRevenue Composition
2004 Revenue Composition
30%
30%
19%
2%
17%1% 1% PSG
IPG
ESS
HPFS
HPS
Software
Corporate Investment
Business Strategic ImperativesBusiness Strategic Imperatives
To provide customers with superior products, To provide customers with superior products, services and overall experiences by providing services and overall experiences by providing leadingedge technologies.leadingedge technologies.
To deliver to business customers the best return To deliver to business customers the best return on IT investments in the industry.on IT investments in the industry.
To build world class cost structures and processes To build world class cost structures and processes across HP's entire portfolio of businesses.across HP's entire portfolio of businesses.
To focus on innovation and research and To focus on innovation and research and development.development.
HP InternationalHP International
Production DistributionProduction Distribution RetailerRetailer
- a party sell HP product to public through their own physical - a party sell HP product to public through their own physical or or internet store. internet store.
ResellersResellers- a party sell HP product and service, frequently with their - a party sell HP product and service, frequently with their
own value-own value- added product or service to targeted customer added product or service to targeted customer groups.groups.
Distribution partnersDistribution partners- a party supply HP solution to small reseller with whom HP - a party supply HP solution to small reseller with whom HP
don’t don’t have direct relationship have direct relationship Independent distributorIndependent distributor
- a party supply HP products into geographies or customer - a party supply HP products into geographies or customer segments segments in which HP have a lesser presence. in which HP have a lesser presence.
Original-equipment-manufactures (OEM)Original-equipment-manufactures (OEM)- a party integrate HP products with their own hardware or - a party integrate HP products with their own hardware or
software software and sell the integrated products. and sell the integrated products.
CompetitionCompetition
Personal Systems GroupPersonal Systems Group– Dell, Toshiba, Apple, and China-based Lenovo GroupDell, Toshiba, Apple, and China-based Lenovo Group
Imaging and Printing GroupImaging and Printing Group– Lexmark, Xerox, Epson, Sony, and CanonLexmark, Xerox, Epson, Sony, and Canon
Enterprise Storage and ServersEnterprise Storage and Servers– IBM, EMC, Dell, and Sun MicrosystemsIBM, EMC, Dell, and Sun Microsystems
HP ServicesHP Services– IBM Global services and EDS CorporationIBM Global services and EDS Corporation
Income Statement AnalysisIncome Statement Analysis
For the fiscal year ended October 31For the fiscal year ended October 31
20042004 2003 2003 2002 2002 2001 2001 2000 2000 1999 1999
Total net revenue $79,905 $73,061 $56,588 $45,226 $48,870 $42,371Total net revenue $79,905 $73,061 $56,588 $45,226 $48,870 $42,371
Total costs of Op 75,678Total costs of Op 75,678 70,165 70,165 57,600 57,600 43,787 44,845 38,553 43,787 44,845 38,553
Net earnings Net earnings 3,497 3,497 2,539 2,539 (903) (903) 408 408 3,697 3,491 3,697 3,491
Net earnings/share 1.16 Net earnings/share 1.16 0.83 0.83 (0.36) (0.36) 0.21 0.21 1.87 1.73 1.87 1.73
Revenue Change over the yearRevenue Change over the year
$-
$10,000
$20,000
$30,000
$40,000$50,000
$60,000
$70,000
$80,000
$90,000
2004 2003 2002 2001 2000 1999
Year
Rev
enu
e
Series1
Income Statement AnalysisIncome Statement Analysis
Revenue increased constantly form 1999 to 2004Revenue increased constantly form 1999 to 2004
Earning from operation drooped from 2000 to 2002, then starting to Earning from operation drooped from 2000 to 2002, then starting to increase from 2002 to 2004increase from 2002 to 2004
– the reason of negative earning from operation in 2002 is that HP bought Compaq. It the reason of negative earning from operation in 2002 is that HP bought Compaq. It invested lots of money on this project.invested lots of money on this project.
Net earning follows the same pattern as earning from operationNet earning follows the same pattern as earning from operation
Cash Flow Statement AnalysisCash Flow Statement Analysis
228539.45228539.45MM
61457.161457.17M7M
39765.339765.36M6M
52839.252839.20M0M
69892.269892.20M0M
61038.661038.64M4M
Net market Net market value of value of sharesshares
12.4912.494.334.332.852.851.461.461.851.851.621.62Price to Price to book value book value equityequity
0.1910.1910.260.260.0290.029-0.0249-0.02490.0670.0670.0930.093Return on Return on equityequity
18,295M18,295M14,209M14,209M13,953M13,953M36,262M36,262M37,746M37,746M37,564M37,564MTotal equityTotal equity
17,002M17,002M19,800M19,800M18,631M18,631M34,448M34,448M36,970M36,970M38,574M38,574MTotal Total LiabilityLiability
35,297M35,297M34,009M34,009M32,584M32,584M70,710M70,710M74,716M74,716M76,138M76,138MTotal assetTotal asset
199919992000200020012001200220022003200320042004
Balance Sheet Analysis
Balance Sheet AnalysisBalance Sheet Analysis
The huge drop on The huge drop on Price to Book value equity from 1999 Price to Book value equity from 1999 to 2000 is due to large dividend payoff at $15.59/share.to 2000 is due to large dividend payoff at $15.59/share.
– The larger the dividend payoff, the larger the stock price drop, because The larger the dividend payoff, the larger the stock price drop, because dividend payoff reduce the value of the company.dividend payoff reduce the value of the company.
The negative Return on Equity is due to large The negative Return on Equity is due to large payment to buy the Compaqpayment to buy the Compaq
The Asset, Liability, and Equity has been doubled The Asset, Liability, and Equity has been doubled from 1999 to 2004from 1999 to 2004
Share OutstandingShare Outstanding
Share Outstandi ng vs Year
0500, 000
1, 000, 0001, 500, 0002, 000, 0002, 500, 0003, 000, 0003, 500, 000
1998 1999 2000 2001 2002 2003 2004 2005
Year
Shar
e Ou
tsta
ndin
g
Fundamental InformationFundamental Information
Valuation RatioValuation Ratio
(base on Oct 31, (base on Oct 31, 2005 Yahoo data)2005 Yahoo data)
Hewlett-Packard Hewlett-Packard CoCo..
Industry:Industry: Diversified Diversified Computer Systems Computer Systems
Sector:Sector:
TechnologyTechnology
MarketMarketCapCap
80.1B 80.1B 225.2B 225.2B 4508.4B 4508.4B
P/EP/E 26.73 26.73 20.20 20.20 33.12 33.12
Div. Yield %Div. Yield % 1.10 1.10 0.96 0.96 2.05 2.05
Price toPrice toBook ValueBook Value
2.15 2.15 4.75 4.75 5.56 5.56
Price toPrice toFree Cash Flow Free Cash Flow
46.48 46.48 38.50 38.50 33.70 33.70
Value DriverValue Driver
Imaging and Printing Group & HP ServicesImaging and Printing Group & HP Services– Contribute 96.5% of earning from operations on 2004Contribute 96.5% of earning from operations on 2004
Economies of scaleEconomies of scale– Second largest Market Capital in industry (Diversified Computer Second largest Market Capital in industry (Diversified Computer
Systems industry)Systems industry)
Brand RecognitionBrand Recognition -Provide high quality products-Provide high quality products
-Reliable services-Reliable services
-Leading innovator in imaging and printing technology-Leading innovator in imaging and printing technology
Value DriverValue Driver
Value DriverValue Driver(Economies of Scale)(Economies of Scale)
Diversified Computer Diversified Computer Systems industrySystems industry Symbol Symbol Market Cap Market Cap
International Business International Business Machines Corp.Machines Corp.
IBMIBM 128.04B 128.04B
Hewlett-Packard Co.Hewlett-Packard Co. HPQHPQ 82.48B 82.48B
Sun Microsystems Inc. Sun Microsystems Inc. SUNWSUNW 12.72B 12.72B
Scientific Games Corp. Scientific Games Corp. SGMSSGMS 2.67B 2.67B
Rackable Systems Inc. Rackable Systems Inc. RACKRACK 337.45M 337.45M
Security ValuationSecurity Valuation
To evaluate the HP stock, we use FCFE To evaluate the HP stock, we use FCFE discounted cash flow model:discounted cash flow model:
P(0)=FCFE*(0)(1+g)/(k-g)P(0)=FCFE*(0)(1+g)/(k-g)
From previous financial statement we can From previous financial statement we can calculate the FCFE as:calculate the FCFE as:
– FCFE=Cash flow from operation - Capital expenditures FCFE=Cash flow from operation - Capital expenditures - Preferred dividends - Debt principal - Preferred dividends - Debt principal
repayments repayments + Proceeds of new debt issues + Proceeds of new debt issues
– Therefore, the FCFE*(0) on 2004 is $1.6Therefore, the FCFE*(0) on 2004 is $1.6
Security ValuationSecurity Valuation
Some important data used for evaluating the HP Some important data used for evaluating the HP stockstock
– Beta of HP = 1.91Beta of HP = 1.91
– Riskless return rate =4.55% (5 years Treasure bond)Riskless return rate =4.55% (5 years Treasure bond)– Market expected return rate = 9.5% (S&P 500)Market expected return rate = 9.5% (S&P 500)
To calculate K, we use CAPM.To calculate K, we use CAPM.– k= 4.55%+ 1.91(9.5%-4.55%) =14%k= 4.55%+ 1.91(9.5%-4.55%) =14%
To calculate the growth rate g, we use past 5 To calculate the growth rate g, we use past 5 years average net income growth rate.years average net income growth rate.
– g= 0.029g= 0.029
Security ValuationSecurity Valuation
Given: Given: – Beta of HP = 1.9,Beta of HP = 1.9,Riskless return rate =4.55%, Market return Riskless return rate =4.55%, Market return
rate = 9.5%, k=14%, rate = 9.5%, k=14%, g= 0.029, and FCFE*(0) = 1.6g= 0.029, and FCFE*(0) = 1.6
P(0)=FCFE*(0)(1+g)/(k-g) P(0)=FCFE*(0)(1+g)/(k-g) – P(0)= 1.6(1+0.029)/(0.14-0.029)=$14.83P(0)= 1.6(1+0.029)/(0.14-0.029)=$14.83
The Application of FisherThe Application of Fisher
The Sales Growth and Product DevelopmentThe Sales Growth and Product Development– Sales constantly grow over the yearSales constantly grow over the year
– Leading product innovatorLeading product innovator
Management EfficiencyManagement Efficiency– Effective ManagementEffective Management
– Experienced Executive Team Experienced Executive Team
The Application of FisherThe Application of Fisher
CompetitionCompetition– the competition is highthe competition is high
– the second largest market capital in US Diversified Computer the second largest market capital in US Diversified Computer Systems industrySystems industry
Shareholder’s Benefit DilutionShareholder’s Benefit Dilution– the positive net income can support HP's future growth without the positive net income can support HP's future growth without
sacrificing the current shareholder’s benefitsacrificing the current shareholder’s benefit
Current Stock PriceCurrent Stock Price– median price (high potential to grow)median price (high potential to grow)
RecommendationRecommendation
HoldHold the HP stock the HP stock
– Economies of scaleEconomies of scale– Constantly quarterly dividends pay out and dividend yield is Constantly quarterly dividends pay out and dividend yield is
great than Diversified Computer Systems industry’s great than Diversified Computer Systems industry’s average.average.
– High profitability of HP services and imaging and printing High profitability of HP services and imaging and printing groupgroup
appleapple
It just worksIt just works
HistoryHistory
Apple Computer, Inc. was incorporated in Apple Computer, Inc. was incorporated in California, January 3, 1977California, January 3, 1977
One of the earliest company that make One of the earliest company that make personal computerspersonal computers
ProductProduct
Macintosh line of desktop and laptop computerMacintosh line of desktop and laptop computer Related software, services, and networking Related software, services, and networking
solutionssolutions Portable digital music playerPortable digital music player Xserve server and Xserve RAID storage Xserve server and Xserve RAID storage
productsproducts Professional software applicationsProfessional software applications OS X operating systemOS X operating system iTunes Music StoreiTunes Music Store Support lineSupport line
Business StrategyBusiness Strategy
Digital Hub (iPod, PDA, Camera)Digital Hub (iPod, PDA, Camera)Expanded Distribution (Own store)Expanded Distribution (Own store)Education (Free machine for school)Education (Free machine for school)Creative Professionals (Final cut…)Creative Professionals (Final cut…)
GlobalizationGlobalization
MacMac
$2,399 - $3,999
$1,799 - $2,999 $1,599 - $1,999
$1,249 - $1,649 $629 - $899
Professional SoftwareProfessional Software
$1,499
$1,299
$599
iPodiPod
$379 - $499
$249 - $299
$129 - $169
Sales by ProductSales by Product
He is the GuyHe is the Guy
CEO of AppleSince 1998 - The guy turnedApple around
Market TodayMarket Today
Stock MarketStock Market
Stock MarketStock Market(What happened before 1998)
Earnings (before 1998)Earnings (before 1998)
Free Cash Flow (before 1998)Free Cash Flow (before 1998)
1996 1997 1998
FCF $ 341 $101 $ 729
Cash Flow Statement: Operating, Financing,
Investing(Time of burning money)
Stock MarketStock Market(What happened between 1998 - 2000)
Earnings (1998-2000)Earnings (1998-2000)
Free Cash Flow (1998-2000)Free Cash Flow (1998-2000)
1998 1999 2000
FCF $ 729 $ 751 $ 719
Cash Flow Statement: Operating, Financing,
Investing(Jobs start to saving
Apple)
What is the DriverWhat is the Driver
New iMac saved Apple
Stock MarketStock MarketWhat happened after 2000
2000 - the nightmare of PC2000 - the nightmare of PC
Economical reason hurt PC industryEconomical reason hurt PC industryApple stock dropped sharply Apple stock dropped sharply Jobs notes that PC making may not save Jobs notes that PC making may not save
Apple this timeApple this time
Earnings (2001-today)Earnings (2001-today)
Free Cash Flow (2002-2004)Free Cash Flow (2002-2004)
2002 2003 2004
FCF $ -85 $ 125 $ 760
Cash Flow Statement: Operating, Financing,
Investing(Jobs’ new idea of
Saving Apple)
What is the DriverWhat is the Driver
iPod and iTunes turned Apple around
iPod introducedyear 2001
Balance SheetBalance Sheet
2002 2003 2004
P-BE 1.26 1.70 4.97
net Asset 5,143,882 7,195,855 25,208,993
ForecastingForecasting
Driver today (iPod and iTunes)Driver today (iPod and iTunes)Driver tomorrow (More related product)Driver tomorrow (More related product)Or is it… (Apple is changing)Or is it… (Apple is changing)
What make Mac a “Mac”What make Mac a “Mac”
Operating System (Mac OS X)Operating System (Mac OS X)CPU (G5 made by IBM)CPU (G5 made by IBM)
Mac or PCMac or PCApple moving to Intel
Buy or SellBuy or Sell
Rf Rm Beta k g FCFE
4.55% 9.50% 1.51 12.02 10.2 1.64
By using the Free Cash Flow valuation model
P0 = $99.3
Buy or SellBuy or SellGrowth was unrealGrowth was unrealP/E is highP/E is highAlmost the end of year...Almost the end of year...
Fisher’s TheoryFisher’s Theory
The Sales Growth and Product DevelopmThe Sales Growth and Product Development - Strongent - Strong
Strong sale growthStrong sale growthLeading product innovatorLeading product innovator
Management Efficiency - StrongManagement Efficiency - StrongEffective Management (Jobs’ team)Effective Management (Jobs’ team)
Fisher’s TheoryFisher’s Theory
Competition - Strong in digital music playeCompetition - Strong in digital music playerr
The competition is highThe competition is high The best seller of portable music playerThe best seller of portable music player
Stock price - HighStock price - High
Current SituationCurrent Situation
Strong sale of 2005 last quarter
RecommendationRecommendation
It it not a good time to buyIt it not a good time to buy If you bought it months ago you can hold If you bought it months ago you can hold
until end of the year and then sell it before until end of the year and then sell it before the Holidaythe Holiday
DELL Inc.
• Founded in 1984 by Michael Dell• Customer-focused Direct Business Model• Shares traded on NASDAQ, volume is 2.4
Billion, current price is $31.31 per share,code is DELL
• Fiscal year ended in January 28• Current president and CEO is Kevin B.
Rollins
Industry Position
• 55,200 full-time employees• 7 manufacture facilities around the world, the
newest and largest facility, the seventh overall is in North California
• Industry Leader on Market Capitalization $74.5 billion
• The biggest PC maker in the world.
DELL Stock (NASDAQ)
DELL Stock
DELL-Q Last Trade:
Nov 01, 2005 16:00 EST
Last: US$
29.240 Net Change: US$ -2.640 % Change: -8.28%
Open 29.890 Bid 29.230
High 30.020 Ask 29.230
Low 28.810 EPS 1.37
Volume 105,361,100 P/E 21.30
52-Week High
42.570 Indicated 0.00
Annual Div.
52-Week Low
30.820 Yield 0.00
Performance In Recent Five Year(2000-2005)
Volume of Shares
2,5652,584
2,6022,582
2,536 2,531
2631
2838
2,400
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
1,997 1,998 1,999 2,000 2,001 2,002 2,003 2,004 2,005
Management of DELL Inc.
• President and CEO: Kevin B. Rollins– driving Global Growth, – Achieving Product Leadership, – enhancing the Customer Experience– developing our Winning Culture
• Chairman of the Board: Michael S. Dell– “No other technology company listens to customers, collaborat
es with partners, adds its own significant layer of innovation and delivers relevant technology more efficiently and effectively than Dell.”
Business Model
• Customer-focused direct business model– Unique way of selling technology and
revolutionary customer experience
• Five tenets of this model– Most Efficient Path to the Customer– Single Point of Accountability– Build-to-Order– Low-Cost Leader– Standards-Based Technology
Products and Services
• Enterprise system (servers, networking stations)
• Computer system (Desktops, laptops) and computer peripherals.
• Storage products• Printing and imaging system• Software products related to their products• Financial and technical supporting
services
Percentage of Revenue, by product line
2005 2004 2003 2002 2001
Desktops 50% 51% 53% 53% 53%
Notebooks 29% 27% 27% 28% 29%
Enterprise 21% 22% 20% 19% 18%
Total 100% 100% 100% 100% 100%
Area Revenue Comparison
2005 Fiscal Year(ended on January 28)
Europe22%
AsiaPacific-Japan11%
Americas67%
Financial Statement Analysis
• Using the three financial statements – Income statement– Balance sheet– Cash flow statement
• The latest quarter statement
Income statement
All Number in Miiliions
Period Ended 2005 January
28
Change 2004 January
30
Change 2003 January
31
Total Revenue $49,205 18.73% $41,444 17.06% $35,404
Cost of Revenue $40,190 18.58% $33,892 16.65% $29,055
Gross Margin $9,015 19.37% $7,552 18.95% $6,349
Gross Margin/Revenue 18.32% 0.54% 18.22% 1.61% 17.93%
Operating Expense $4,761 18.79% $4,008 14.35% $3,505
Operating Income $4,254 20.03% $3,544 24.61% $2,844
Net Income $3,043 15.05% $2,645 24.65% $2,122
Price to Book Value of Equity
12
18.37
54.52
25.29
10.8
0
10
20
30
40
50
60
2005 2004 2003 2002 2001
Price to Earnings
59.76
32.25
63.02
94.34
38.84
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
2005 2004 2003 2002 2001
Revenue growth(in millions of dollar)
18.7%17.1%
13.6%
-2.3%
26.2%
38.5%
48.0%
58.9%
46.5%
52.4%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Cost Structure
81.6%
9.6%
81.8%
9.7%
82.0%
9.9%
82.3%
9.7%
79.8%
11.9%
79.3%
11.7%
77.5%
11.3%
77.9%
11.4%
78.5%
12.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Cost of Revenue Total Operating Expense
2005
2004
2003
2002
2001
2000
1999
1998
1997
Profit Margin
6.68%
7.66%8.00%
6.59%6.83%
4.00%
5.99%6.38% 6.18%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005
GAAP Net Income Growth Trend (in millions of dollars)
15.0%
24.6%
70.3%
-42.8%
30.7%
14.1%
54.7%
82.2%
90.4%
82.6%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Balance Sheet Statement (Assets)Assets
Current Assets
Cash And Cash Equivalents 4,747,000 4,317,000 4,232,000
Short Term Investments 5,060,000 835,000 406,000
Net Receivables 4,414,000 3,635,000 2,586,000
Inventory 459,000 327,000 306,000
Other Current Assets 2,217,000 1,519,000 1,394,000
Total Current Assets 16,897,000 10,633,000 8,924,000
Long Term Investments 4,319,000 6,770,000 5,267,000
Property Plant and Equipment 1,691,000 1,517,000 913,000
Other Assets 308,000 391,000 366,000
Total Assets 23,215,000 19,311,000 15,470,000
Cash Flow Statement(in thousands)
Period Ending 28-Jan-05 30-Jan-04 31-Jan-03
Net Income 3,043,000 2,645,000 2,122,000
Operating Activities, Cash Flows Provided by or Used in
Depreciation 334,000 263,000 211,000
Adjustment To Net Income (275,000) (383,000) (217,000)
Changes In Accounts Receivables - (813,000) 190,000
Changes In Liabilities - 2,150,000 1,429,000
Changes In Inventories - (53,000) (21,000)
Changes In Other Operating Activities 2,208,000 (139,000) (176,000)
Total Cash Flow From Operating Activities 5,310,000 3,670,000 3,538,000
Cash Flow Statement (Continued)
Investing Activities, Cash Flows Provided By or Used in
Capital Expenditure (525,000) (329,000) (305,000)
Investment (1,792,000)(1,792,000) (2,021,000)(2,021,000) (1,076,000)(1,076,000)
Other Cash flows from Investing Activities (464,000)
Total Cash Flows from Investing Activities (2,317,000) (2,814,000) (1,381,000)
Financing Activities, Cash Flows Provided By or Used in
Dividend Paid - - -
Sale Purchase of Stock (3,128,000) (1,383,000) (2,025,000)
Net Borrowings - - -
Total Cash Flows From Financing Activities (3,128,000) (1,383,000) (2,025,000)
Effect of Exchange Rate Changes 565,000 612,000 459,000
Change In Cash and Cash Equivalents 430,000 85,000 591,000
Free Cash Flow 4,785,ooo 3,341,000 1,817,000
Net Cash Increase5,310
3,6703,538
3,797
4,195
3,926
2,436
1,592
1,362
175
0
1,000
2,000
3,000
4,000
5,000
6,000
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Quarterly Statement
Ratios Prior 5 Quarter Results
Q2-FY06 Q1-FY06 Q4-FY05 Q3-FY05 Q2-FY05
Current ratio 1.17 1.19 1.20 1.11 1.03
Quick ratio 1.13 0.98 1.01 0.91 0.81
Cash conversion cycle (38) (39) (37) (34) (35)
Days supply in inventory 5 4 4 4 4
Days of sales outstanding 1 33 32 32 33 31
Days in accounts payable 76 75 73 71 70
Cash flow (millions):
Cash flow from operations $ 919 $ 1,190 $ 1,818 $ 1,787 $ 703
Per share $ 0.38 $ 0.48 $ 0.73 $ 0.72 $ 0.28
Net free cash flows 2 $ 609 $ 1,011 $ 1,569 $ 1,609 $ 524
Cash and investments $ 12,671 $ 13,416 $ 14,127 $ 12,436 $ 11,810
Shares repurchased (millions) 47 50 22 38 25
Quarterly Assets Statement
Prior 5 Quarter Results
Q2-FY06 Q1-FY06 Q4-FY05 Q3-FY05 Q2-FY05
Assets:
Cash & cash equivalents $ 6,337 $ 5,874 $ 4,747 $ 4,525 $ 4,025
Short-term investments 2,709 2,709 3,967 3,967 5,060 2,969 1,509
Accounts receivable, net 4,443 4,289 4,414 4,167 3,625
Inventories 570 483 459 415 418
Other 2,739 2,439 2,217 2,124 2,055
Total current assets 16,798 17,052 16,897 14,200 11,632
PP&E, net 1,843 1,741 1,691 1,627 1,578
Investments 3,625 3,574 4,319 4,942 6,276
Other non-current assets 345 320 308 285 446
Total assets: 22,611 22,687 23,215 21,054 19,932
Return on Equity
46.9%
42.1%43.5%
26.5%
38.7%
31.4%
62.9%
73.0%
47.7%
28.0%
22.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Return of Assets
13.1%13.7% 13.7%
9.2%
16.2%
14.5%
21.2%22.1%
17.3%
12.7%
9.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Management Effectiveness
• Dell has superior return of assets (ROA) and return of equity (ROE) compared with other competitors such like Apple, HP.
• Higher ROA and ROA mean Dell are able to earn more profits by using less capitals.
• High ROA and ROE attract more investors.
Value Driver of Stock Price
• Growth of revenue– Growth of international market share– New Product Assemble Line– Reducing shipment cost
• Cost-efficient innovation– Low investment on R&D but better on satisfying
market demand
• Growth of earnings– Earning from investing in the financial market
The Application of Fisher
• Stable and fast Sales Growth and Product Development
– Sales constantly grow over the year. Expected sales in 2006 is $60 billion US, and 2007 expected sales reach $80 billion.
– Increasing market share.
– More product lines, entering the home entertainment industry, such as LCD, plasma TV.
• Management Performance– Effective and efficient Management, high ROE, ROA above the
industry average.
– Winning culture from beginning.
The Application of Fisher
• Competition– PC industry competition is high
– the largest market capital in PC industry, $70.0 Billion
– 7 manufacture factories all over the world (US, Europe, Asia, Japan)
Free-Cash-Flow-to-Equity Discount Model
• Beta for DELL INC.=1.43
• Rf = 4.55% (Five-year US Treasury)
• Expected yearly market return on S&P 500 Stock Index = 17.40 %
• Using CAPM: k = Rf +*(Rm - Rf ) = 22.92 %
• The retained earning growth rate, g, was estimated be average per year.
• The FCFE model is given by: FCFE0 (1+g)/(k - g)
• The growth g = 0.1894
Recommendation
• The price of the Dell is $33.60 below the current price = $29.94.
•BUY Now!!