(This is a highly-abbreviated version of a full write-up pulled from the SumZero community)
Source: Hedge Fund
Location: Dallas, TX
Current Price: $17.30
Target Price: $24.50
Timeframe: 1-2 Years
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.
*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.
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.