Financial Analysis and Forecasting

1. Financial Analysis and Forecasting Professor Carlos Vecino E14 - Team 91 Case: Dell

2. Dell suffered a dramatic fall in its stock price during the year 2000. The fall in stock price was generated by internal poor performance or was it a general industry crisis?Presenter: Anya Grant XU OLIVEIRA ZHENG O’CONNELL

3. Overview of the IT Industry in 2000 Overview of the PC Industry in 2000 Dell and Industry Ratios Observations and evaluations of Dell’s Performance and Stock Price Notes Questions IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Agenda

4. US faced it’s most controversial election in 2000 bringing political instability to the an already weakening economy. This exacerbated IT industry problems. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Overview of the IT industry 2000

5. “Wall Street: Is the party over?”is stated in the Business Week Cover in April, 17th, 2000. Time Europe “A Market Fit to Burst” The IT Industry was facing a general scenario of caution by investors and the IT companies’ stock values began to fall dramatically. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Overview of the IT industry 2000

6. The Nasdaq Index experienced tremendous growth in September, 1999, but started to fall, “coming back to earth” (Business Week April 2000). IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Overview of the IT industry 2000

7. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Overview of the IT industry 2000 • The TOP 10 fall records in the Nasdaq history happened in the year 2000.

8. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Overview of PC Industry and the Economy • US quarterly GDP saw slow growth in Q4 of 2000 and negative growth in Q1 2001. Most economists predicting first recession since early 90’s. • Reduced tech spending among major US firms will have a negative impact on sales. “Especially hard-hit in these purchasing trims:PCs … that don't provide much profit bang for the buck.” (Business Week, Dec. 18, 2000) • The falloff in corporate IT spending has spread worldwide, too, coming home to roost among American suppliers. In Europe, slow adoption of Microsoft Corp.'s new Windows 2000 software has pulled down corporate PC sales by over 20% this year. That slammed the earnings of … Dell Computer Corp., which had counted on the European market for a sales boost.

9. Dell’s Performance Highlights Common Size comparisons Base Year Comparisons Liquidity Ratios Efficiency Ratios Financial Leverage Profitability Ratios ROE Decomposition IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and PC Industry Analysis

10. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell’s Performance Highlights • Dellrevenues increased 26% in 2000 over 1999. • EBITDA increased 20% • The EBITDA as a proportion of revenues decreased by 7% in 2000 in comparison with the same proportion in 1999. • The net income increased 31% in 2000 • Analyzing the Common Size combined with the Common Base Year, net profit as percentage of sales increased 4%. • Total current assets increased by 24% in 2000 over 1999 and total current liabilities increased 26% in the same period.

11. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Common Size Comparison Highlights • Industry average of inventory as a percentage of total assets is 9,6%.Dell carries inventory valued at 2,9% of its total assets. • The industry average for COGS as a percentage of revenues is 72%.Dell has COGS as 80% of its revenues. • The industry selling expenses average represents 14% of the revenues. For Dell, this represents only 10% of revenues.

12. The current assetsof Dellrepresents 70.64% of its total assets. The industry current assets over total assets average is 58.35%. In 2000, Cash and Securities represent 40.5% of total assets vs. competitor’s average of 10.3%. We can assume that Dell has less proportion of assets as fixed costs than the average of its competitors. % of Current Assets and Other Assets Other Assets Other Assets Current Assets Current Assets IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Common Size Comparisons

13. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Common Base Year Comparisons • In 2000, Dell’s cash increased 32% over 1999, industry average dropped 35% ; • Dell’s inventory increased 2%; industry average increased by 22%; • Dell’s net income increased 31%; industry average dropped 8%; • Dell’s EPS increased 27%; the industry average dropped 8%; • Dell’s net cash provided by operating activities increased 7%; industry average dropped 31%.

14. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Liquidity • In 2000, Dell’s current ratio was 7% better than the average of it’s competitors. • HP had a result 6% better than Dell in 2000. • Dell had a current ratio 20% better than IBMin 2000.

15. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Liquidity • In 2000, Dell improved its results by 11% in Cash plus securities over its total assets from 1999. • All major competitors saw their ratios decline in 2000. • This ratio is 290% better than the average.

16. At the end of 2000, Dell held 5.74 days of inventory vs 7.12 in 1999. The average industry result for this ratio was 32.58 days. Dellachieved a result 82,4% better than the industry average, which means approximately 26 days of better efficiency managing the inventory. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Efficiency

17. Dell achieved in 2000 a financing period of-23 days. This result is 82 days better than the average of industry of +59 days 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Efficiency IND. AVG DELL IBM GATEWAY HP COMPAQ

18. Dell’s Debt over EBITDA is 56% lower than the average for the industry. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Financial Leverage

19. Dell is able to pay58 times its interests. The average industry is able to pay 13.6 times its interests. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell and Industry Financial Leverage

20. In 2000, Dell achieved a return on assets of 16,2%. This performance was130% better than the industry average and up 6.7% from 1999. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell’s Profitability

21. In 2000, Dell achieved a return on common equity of 39%, up 26% from 1999. This performance was96.5% better than the industry average in 2000. IBM achieved a return on equity of 38%. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell’s Profitability

22. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Dell – ROE Decomposition • The Du Pont Identity ROE = Net income/Sales * Sales/Total asset * (1+Debt/Equity ratio) = Profit margin * Total asset turnover * Equity multiplier = Operating efficiency * Asset use efficiency * Financial Leverage

23. 2000 1999 2000 1999 IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Market to Book Ratio • Dell achieved in 2000 a market to book ratio of 8.04. • The average for the industry in 2000 was 4.05.

24. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Stock Price Comparison (Jan 1,1996 to Jan 1, 2001) • DELL had its stocks price declining from US$ 51 in 1999 to US$16 in 2000. Drop 70%. • Gateway stocks price dropped 75% in the same period, from US$72 to US$18. • IBMstocks price declinedonly 21% and HP 29% IBM HP Gateway DELL Compaq

25. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Summary • State of Competitive Advantages: • COST LEADERSHIP + Direct Marketing : • Liquidity: • Cash on hand increased 32% and Cash/Assets is 290% above industry; • Low fixed assets: Less than 30% of total assets (vs 42% industry average); • Efficiency: • Low Inventories: Turnover of 5.7 days vs industry average of 32.6 days; • Cash-to-Cash: 82 days faster than industry average; • Financial Leverage: • No short-term debt, and long-term debt: Interest charge coverage 425% above industry average; • Profitability: • ROA: 130% above industry average; • Return on common equity : 39% --------- 96.5% higher than industry average and equivalent to IBM; • Results support benefits of current Direct Model strategy

26. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Observations and Evaluation – Stock Price • RISE: • 5600% increase in share value over 4 years based on a combination of very favourable market conditions and forecasts in mid to late 90’s and the successful implementation of the Direct Model Marketing strategy which gives Dell a clear, sustainable competitive advantage over competition in PC Industry; • FALL: • Penetration rates into homes reached 50% in 2000 and e-commerce transactions were much lower than 90’s forecasts; • Sales growth in developed countries (America, Europe) down substantially; • Industry-wide shock punctuated by DOT.COM bubble burst; • Market Reaction: • Market re-evaluation of tech stocks, including DELL, on the heels of a major burst and on the toes of a pending recession; • Given going market conditions, investors may have perceived DELL’s focus on PC’s as “riskier” in comparison to more diversified companies such as IBM and HP and stock value was adjusted accordingly; • Observations: • All ratios are consistent with business strategy and competitive advantage and are proof that DELL’s strategy works. • IF IT AIN’T BROKE, DON’T FIX IT!!!!!

27. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Observations and Evaluation – Stock Price • Only one suggestion to the board to reduce slide of stock price: • Dell have a final cash position of 5.4 billion. • Different uses of cash to increase returns; • By distributing more dividends, instead of having this final cash, Dell could perhaps have reduced the drop in its stock price.

28. IT Industry Home PC Industry Dell and Industry Analysis Observations Notes Notes • This presentation and the corresponding excel graphs and analysis are available for students at: http://ca.briefcase.yahoo.com/ Yahoo ID: hecdell Password: team91

29. Questions ? MBA 2003-2004 TEAM 91

30. Financial Analysis and Forecasting Professor Carlos Vecino E14 - Team 91 Case: Dell – Second Part

31. Home Solvency Ratios Dell Du Pont Analysis Conclusion Strengths & Weaknesses Main Uses of Cash Dell’s strengths and possible weaknesses • Strengths: low cost, high efficiency • Lower inventory – from 3.4% of assets to 2% in 2002 • Increase receivable turnover – growth of41% from 2002 over 1999 • Decrease payable turnover • Possible weaknesses • Decrease liquidity by reducing its current assets.

32. Home Solvency Ratios Dell Du Pont Analysis Conclusion Strengths & Weaknesses Main Uses of Cash Short Term Solvency Ratios • Reduced Cash position • Improved Inventory Turnover • Reducing Current Assets Current Ratio -32% Quick Ratio -31% Cash Ratio -35%

33. Home Solvency Ratios Dell Du Pont Analysis Conclusion Strengths & Weaknesses Main Uses of Cash Main Uses of Cash -1999 to 2002 • Dell increased investments94%. In 1999 it was 23.7% of total assets and in 2002 investments represented 34% of total assets. • Dell bought back treasury stocks, reducing total equity from 46.3% of total liabilities + equities in 1999 to 31.5% in 2002.

34. Equity Multiplier increased as a result of: Assets increased 35%from 2002 to 1999 Total equity decreased 8%in the same period Return on Equity increased as a result of: Dell’s Net Income increased 27% Total equity decreased 8%in the same period Home Solvency Ratios Dell Du Pont Analysis Conclusion Strengths & Weaknesses Main Uses of Cash Du Pont Analysis of Dell

35. The strong competitive advantage of Dell is still evident The highest Profitability The highest Efficiency The highest ROA and ROE Home Solvency Ratios Dell Du Pont Analysis Conclusion Strengths & Weaknesses Main Uses of Cash Comparison Dell and Competitors (Du Pont Analysis, 2002)

36. Questions ? MBA 2003-2004 TEAM 91