Quick Pitch: Long on Dell (Nasdaq: DELL)

(This is a highly-abbreviated version of a full write-up pulled from the SumZero community)

Source: Hedge Fund
Location: Dallas, TX

Recommendation: Long
Current Price: $17.30
Target Price: $24.50
Timeframe: 1-2 Years

Quick Thesis:
The market still views this Company as a high-volume, low margin PC manufacturer, but it's made some significant steps towards transitioning to a provider of enterprise solutions and improving its margin profile. Management still has a lot of progress to make, but any delay or missteps is more than priced in at 5x FCF. Also, in the near-term, Dell (Nasdaq: DELL) should be able to take share and face less competition on acquisitions from HP (NYSE: HPQ) as it tries to revive itself.

Key Points:
*Dell has generated ~25% returns on its invested capital and converted more than 100% of its earnings to cash flow, which it’s utilized to repurchase shares (~80% of FCF usage in the last five years);

*Dell trades at a 50% discount to its comps despite having comparable FCF returns on invested capital (‘CFROIC’) and the third highest growth in cash flow per share since the Great Recession;

*Dell currently trades at an ~20% FCF yield.

Conclusion:
I believe that once the Market realizes that a majority of the company's margin expansion is the result of structural changes to the business and not short-term cyclical benefits, the Company will be valued at a 10% yield, which is below its five-year average and current peer average of 8%.

This yield also implies no growth, but Gartner has forecasted demand for servers and PCs to grow by more than 5% and 10% each year. I also think Dell will grow faster than the general market by continuing to grab market share from HP.

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