logging in or signing up PP for FIR Sally0250 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 193 Category: Education License: All Rights Reserved Like it (0) Dislike it (0) Added: December 08, 2009 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Executive Summary : December 2009 Sally Dreibelbis Fienup 1 Executive Summary Analyst Name: Sally Dreibelbis Fienup Company: Dell, Inc. (DELL) Price on 10/29/09: $14.92 Forecast horizon: 1 year Recommendation: BUY Target forecasted price: $35.18 Highlights : December 2009 Sally Dreibelbis Fienup 2 Highlights Largest market segment: personal computers Dell brand Customer service Customization of machines Smartphone/mobile market Revenues slumping Summary of analysis : December 2009 Sally Dreibelbis Fienup 3 Summary of analysis Market capitalization: $28.29B on 10/30/09 Cash: $11.699B based on quarterly data reported 7/31/09 Last 12 months revenue: $53.696B based on last four quarterly reports Operating Cash Flow: $2.48B on 10/30/09 Free cash flow: $1.28B on 10/30/09 Dividends: N/A Qualitative Analysis : Qualitative Analysis Company profile : December 2009 Sally Dreibelbis Fienup 5 Company profile What products do they manufacture? Computer systems Desktop PCs and workstations Notebook computers Servers and networking products Storage solutions Software products Peripheral products Company profile : December 2009 Sally Dreibelbis Fienup 6 Company profile What services do they offer? Infrastructure consulting services Deployment services Asset recovery and recycling services Training services Support services Managed services Financial services Company profile : December 2009 Sally Dreibelbis Fienup 7 Company profile Who are its customers? Large corporate, government, healthcare, and education accounts Small and medium businesses Individual consumers Company profile : December 2009 Sally Dreibelbis Fienup 8 Company profile How are its products sold? Sales representatives Telephone-based sales www.dell.com Company profile : December 2009 Sally Dreibelbis Fienup 9 Company profile Other Perot Systems Corp 1984 Round Rock, Texas Industry overview : December 2009 Sally Dreibelbis Fienup 10 Industry overview Windows 7 Industry overview : December 2009 Sally Dreibelbis Fienup 11 Industry overview PC Revival SWOT analysis : December 2009 Sally Dreibelbis Fienup 12 SWOT analysis Threats Acer Inc. (Pvt1) Hewlett-Packard Company (HPQ) Apple (APPL) International Business Machines Corp. (IBM) SWOT analysis : December 2009 Sally Dreibelbis Fienup 13 SWOT analysis Strengths Third largest company in PC shipments Brand Direct Model approach SWOT analysis : December 2009 Sally Dreibelbis Fienup 14 SWOT analysis Weaknesses Customer service Blog backlash SWOT analysis : December 2009 Sally Dreibelbis Fienup 15 SWOT analysis Opportunities Google’s Android mobile software Netbooks Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 16 Porters 5 competitive forces (Some repeats) Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 17 Porters 5 competitive forces The threat of substitute products Hewlett-Packard Company and Acer Prices Apple Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 18 Porters 5 competitive forces The threat of the entry of new competitors Smaller company introduces a new product, competitor buys out smaller company Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 19 Porters 5 competitive forces The intensity of competitive rivalry Mac commercials bashing PCs Amongst PCs makers, the rivalry is not as publicly intense, but is still very intense. Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 20 Porters 5 competitive forces The bargaining power of customers “Consumers are relentlessly looking for bargains.” Because of the internet, consumers have the ability to go price shopping. Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 21 Porters 5 competitive forces The bargaining power of suppliers Dell > suppliers (ex. carbon emission levels) Management : December 2009 Sally Dreibelbis Fienup 22 Management Michael S. Dell, Chairman of the Board, CEO Brian T. Gladden, Chief Financial Officer, Sr. VP Paul D. Bell, President – Global Public Jeffrey W. Clarke, Vice Chairman – Operations & Technology Stephen J. Felice, President – Global Small & Medium Business Stephen F. Schuckenbrock, President – Global Large Enterprise Ronald G. Garriques, President – Global Consumer Group Lawrence P. Tu, Sr. VP, General Counsel, Secretary Andrew C. Esparza , Sr. VP – HR What are the people like? : December 2009 Sally Dreibelbis Fienup 23 What are the people like? Michael Dell Born in February 1965, Chairman of the Board of Directors and CEO Founded in 1984 with $1,000 1992 = youngest CEO ever to earn a ranking on the Fortune 500 Direct From Dell: Strategies That Revolutionized an Industry What are the people like? : December 2009 Sally Dreibelbis Fienup 24 What are the people like? Brian Gladden SVP, CFO Joined Dell in June 2008 Was president and CEO of SABIC Innovative Plastics Holding BV Spent nearly 20 years with GE What are the people like? : December 2009 Sally Dreibelbis Fienup 25 What are the people like? Paul Bell President, Public As a stand-alone business, Dell’s Public Sector business unit would rank among the Fortune 200 Hhas been with Dell for more than 13 years What are the people like? : December 2009 Sally Dreibelbis Fienup 26 What are the people like? Ron Garriques President, Consumer Prior to joining Dell, Motorola How are they paid? : December 2009 Sally Dreibelbis Fienup 27 How are they paid? Michael Dell and Ron Garriques own a large portion of Dell stocks Garriques has restricted stock that is a grant of restricted units equal to 600% of Garriques’ actual annual base salary for that year Major owners (~1.96B shares outstanding) : December 2009 Sally Dreibelbis Fienup 28 Major owners (~1.96B shares outstanding) Specific holders Major owners (~1.96B shares outstanding) : December 2009 Sally Dreibelbis Fienup 29 Major owners (~1.96B shares outstanding) Breakdown News : December 2009 Sally Dreibelbis Fienup 30 News Perot Systems News : December 2009 Sally Dreibelbis Fienup 31 News Acer overtook Dell as the world's #2 PC brand Microsoft launched Windows 7 Dell is now planning to launch a smartphone Dell announced plans to lower costs by $3 billion by 2011 Prices High in past three mos.: 8/28/09: $17.26 Low in past three mos.: 8/6/09: $13.07 Summary of technical analysis & charts : December 2009 Sally Dreibelbis Fienup 32 Summary of technical analysis & charts The chart above shows 52-week price history Highest price in past 52 weeks: 8/28/09: $17.26 Lowest price in past 52 weeks: 2/20/09: $7.84 This is a $9.42 range. The stock is currently trading at the high end of its 52-week range. Financial Ratio Analysis : Financial Ratio Analysis (Based on Dell’s report ended July 31, 2009) Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 34 Financial Ratio Analysis Short-term solvency, or liquidity, ratios Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 35 Financial Ratio Analysis Long-term solvency, or financial leverage, ratios *Used “total liabilities” figure for “total debt.” Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 36 Financial Ratio Analysis Asset utilization, or turnover, ratios *Used “cost of revenue” figure from DELL’s Income Statement for “cost of goods sold.” **Used “total revenue” figure from DELL’s Income Statement for “sales.” ***Used “net receivable” figure from DELL’s Balance Sheet for “accounts receivable.” Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 37 Financial Ratio Analysis Profitability ratios I used annual data ended 1/30/09 for these three formulas, not quarterly data. Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 38 Financial Ratio Analysis Market Value ratios *Book value per share = Total shareholders equity/Total shares outstanding Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 39 Financial Ratio Analysis ROE using the extended Du-Pont Analysis Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 40 Time Series Analysis of DELL’s ROE ROE for DELL over the last 3 years Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 41 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 42 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 43 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 44 Time Series Analysis of DELL’s ROE Cross-sectional analysis for DELL : December 2009 Sally Dreibelbis Fienup 45 Cross-sectional analysis for DELL Cross-sectional analysis for DELL : December 2009 Sally Dreibelbis Fienup 46 Cross-sectional analysis for DELL Earnings Per Share And Cash Flow Per Share For DELL For FY 2010 : December 2009 Sally Dreibelbis Fienup 47 Earnings Per Share And Cash Flow Per Share For DELL For FY 2010 Economic analysis : December 2009 Sally Dreibelbis Fienup 48 Economic analysis Recessionary period Dell should expect below average (time trend) growth Lower risk appetite could negatively impact R&D Company analysis : December 2009 Sally Dreibelbis Fienup 49 Company analysis Dell had a very tough first quarter ended May 2009 Perot Systems purchase will impact DELL in the long term positively, but in the short term, may cause for some logistical concerns and loss of focus Analyst’s prediction of revenue of $51.6568B in 2010, a decrease of approximately 16%, was a little extreme Discount rate : December 2009 Sally Dreibelbis Fienup 50 Discount rate Capital asset pricing model (CAPM) The required or expected return, E(Ri), according to CAPM is E(Ri) = Rf + βi [E(Rmkt) – Rf] Rf = risk free rate = .0035 = .35% (U.S. T-bill) Dell’s beta = βi = 1.36 Rmkt = market-wide stock returns = 12.3% (historic S&P 500 index return) Discount rate : December 2009 Sally Dreibelbis Fienup 51 Discount rate E(Ri) = Rf + βi [E(Rmkt) – Rf] E(Ri) = .0035 + 1.36[.123 – .0035] = .16602 = 16.602% for DELL I am going to say that 16.602% is the expected return on DELL stock if the economy is in a boom situation. Discount rate : December 2009 Sally Dreibelbis Fienup 52 Discount rate Capital asset pricing model (CAPM) I will say that the expected return on the market in a recessionary economy is -12.79%. This is the average loss in a down year between 1926-2006 on large company stocks. Rmkt = market-wide stock returns = -12.79% E(Ri) = Rf + βi [E(Rmkt) – Rf] E(Ri) = .0035 + 1.36[-.1279 – .0035] = -.1752 = -17.52% for DELL in a recession Discount rate : December 2009 Sally Dreibelbis Fienup 53 Discount rate Capital asset pricing model (CAPM) If there is a 40% likelihood for a recession economy and a 60% likelihood for a boom economy E(Ri) = .40(-17.53%) + .60(16.602%) = 2.94% expected growth in Dell’s stock price Risk premium : December 2009 Sally Dreibelbis Fienup 54 Risk premium Risk premium = Expected return – risk-free rate = 2.94% – .35% = 2.59% Valuation based on Discounted Cash Flow : December 2009 Sally Dreibelbis Fienup 55 Valuation based on Discounted Cash Flow Fair value of the time series of future cash flows is computed as P0 = D1 / (R-g) Dell does not pay dividends, so we will focus on using the Price Multiples Valuation Method Valuation based on Price Multiples : December 2009 Sally Dreibelbis Fienup 56 Valuation based on Price Multiples P/E multiple tells us how much investors are willing to pay for every dollar of earning Estimated at 15.27 for company (not forward looking), 15.04 for sector, and 15.98 for market. The average of those P/E benchmarks is 15.43. I did not include the average industry P/E Fair price P0 = EPS1 * P/E1 = $2.28 * 15.43 = $35.18 for DELL Recommendation : December 2009 Sally Dreibelbis Fienup 57 Recommendation Dell is currently below my calculated fair value. Therefore, Dell is a “BUY.” Chief risks/assumptions made during this analysis Dell will quickly implement their pledge to cut costs to adjust to the recession. Efficient launch into the mobile market in 2010. Continued focus on the faster-growing netbook product line. Effective incorporation of Perot Systems into Dell’s already functioning operations. Recommendation : December 2009 Sally Dreibelbis Fienup 58 Recommendation Based on my analysis of Dell, I would rate this as a BUY for investors with a moderate to high risk tolerance Appendix : December 2009 Sally Dreibelbis Fienup 59 Appendix Income statement – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 60 Appendix Income statement – annual Appendix : December 2009 Sally Dreibelbis Fienup 61 Appendix Balance sheet – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 62 Appendix Balance sheet – annual Appendix : December 2009 Sally Dreibelbis Fienup 63 Appendix Cash flow – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 64 Appendix Cash flow – annual You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
PP for FIR Sally0250 Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 193 Category: Education License: All Rights Reserved Like it (0) Dislike it (0) Added: December 08, 2009 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Executive Summary : December 2009 Sally Dreibelbis Fienup 1 Executive Summary Analyst Name: Sally Dreibelbis Fienup Company: Dell, Inc. (DELL) Price on 10/29/09: $14.92 Forecast horizon: 1 year Recommendation: BUY Target forecasted price: $35.18 Highlights : December 2009 Sally Dreibelbis Fienup 2 Highlights Largest market segment: personal computers Dell brand Customer service Customization of machines Smartphone/mobile market Revenues slumping Summary of analysis : December 2009 Sally Dreibelbis Fienup 3 Summary of analysis Market capitalization: $28.29B on 10/30/09 Cash: $11.699B based on quarterly data reported 7/31/09 Last 12 months revenue: $53.696B based on last four quarterly reports Operating Cash Flow: $2.48B on 10/30/09 Free cash flow: $1.28B on 10/30/09 Dividends: N/A Qualitative Analysis : Qualitative Analysis Company profile : December 2009 Sally Dreibelbis Fienup 5 Company profile What products do they manufacture? Computer systems Desktop PCs and workstations Notebook computers Servers and networking products Storage solutions Software products Peripheral products Company profile : December 2009 Sally Dreibelbis Fienup 6 Company profile What services do they offer? Infrastructure consulting services Deployment services Asset recovery and recycling services Training services Support services Managed services Financial services Company profile : December 2009 Sally Dreibelbis Fienup 7 Company profile Who are its customers? Large corporate, government, healthcare, and education accounts Small and medium businesses Individual consumers Company profile : December 2009 Sally Dreibelbis Fienup 8 Company profile How are its products sold? Sales representatives Telephone-based sales www.dell.com Company profile : December 2009 Sally Dreibelbis Fienup 9 Company profile Other Perot Systems Corp 1984 Round Rock, Texas Industry overview : December 2009 Sally Dreibelbis Fienup 10 Industry overview Windows 7 Industry overview : December 2009 Sally Dreibelbis Fienup 11 Industry overview PC Revival SWOT analysis : December 2009 Sally Dreibelbis Fienup 12 SWOT analysis Threats Acer Inc. (Pvt1) Hewlett-Packard Company (HPQ) Apple (APPL) International Business Machines Corp. (IBM) SWOT analysis : December 2009 Sally Dreibelbis Fienup 13 SWOT analysis Strengths Third largest company in PC shipments Brand Direct Model approach SWOT analysis : December 2009 Sally Dreibelbis Fienup 14 SWOT analysis Weaknesses Customer service Blog backlash SWOT analysis : December 2009 Sally Dreibelbis Fienup 15 SWOT analysis Opportunities Google’s Android mobile software Netbooks Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 16 Porters 5 competitive forces (Some repeats) Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 17 Porters 5 competitive forces The threat of substitute products Hewlett-Packard Company and Acer Prices Apple Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 18 Porters 5 competitive forces The threat of the entry of new competitors Smaller company introduces a new product, competitor buys out smaller company Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 19 Porters 5 competitive forces The intensity of competitive rivalry Mac commercials bashing PCs Amongst PCs makers, the rivalry is not as publicly intense, but is still very intense. Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 20 Porters 5 competitive forces The bargaining power of customers “Consumers are relentlessly looking for bargains.” Because of the internet, consumers have the ability to go price shopping. Porters 5 competitive forces : December 2009 Sally Dreibelbis Fienup 21 Porters 5 competitive forces The bargaining power of suppliers Dell > suppliers (ex. carbon emission levels) Management : December 2009 Sally Dreibelbis Fienup 22 Management Michael S. Dell, Chairman of the Board, CEO Brian T. Gladden, Chief Financial Officer, Sr. VP Paul D. Bell, President – Global Public Jeffrey W. Clarke, Vice Chairman – Operations & Technology Stephen J. Felice, President – Global Small & Medium Business Stephen F. Schuckenbrock, President – Global Large Enterprise Ronald G. Garriques, President – Global Consumer Group Lawrence P. Tu, Sr. VP, General Counsel, Secretary Andrew C. Esparza , Sr. VP – HR What are the people like? : December 2009 Sally Dreibelbis Fienup 23 What are the people like? Michael Dell Born in February 1965, Chairman of the Board of Directors and CEO Founded in 1984 with $1,000 1992 = youngest CEO ever to earn a ranking on the Fortune 500 Direct From Dell: Strategies That Revolutionized an Industry What are the people like? : December 2009 Sally Dreibelbis Fienup 24 What are the people like? Brian Gladden SVP, CFO Joined Dell in June 2008 Was president and CEO of SABIC Innovative Plastics Holding BV Spent nearly 20 years with GE What are the people like? : December 2009 Sally Dreibelbis Fienup 25 What are the people like? Paul Bell President, Public As a stand-alone business, Dell’s Public Sector business unit would rank among the Fortune 200 Hhas been with Dell for more than 13 years What are the people like? : December 2009 Sally Dreibelbis Fienup 26 What are the people like? Ron Garriques President, Consumer Prior to joining Dell, Motorola How are they paid? : December 2009 Sally Dreibelbis Fienup 27 How are they paid? Michael Dell and Ron Garriques own a large portion of Dell stocks Garriques has restricted stock that is a grant of restricted units equal to 600% of Garriques’ actual annual base salary for that year Major owners (~1.96B shares outstanding) : December 2009 Sally Dreibelbis Fienup 28 Major owners (~1.96B shares outstanding) Specific holders Major owners (~1.96B shares outstanding) : December 2009 Sally Dreibelbis Fienup 29 Major owners (~1.96B shares outstanding) Breakdown News : December 2009 Sally Dreibelbis Fienup 30 News Perot Systems News : December 2009 Sally Dreibelbis Fienup 31 News Acer overtook Dell as the world's #2 PC brand Microsoft launched Windows 7 Dell is now planning to launch a smartphone Dell announced plans to lower costs by $3 billion by 2011 Prices High in past three mos.: 8/28/09: $17.26 Low in past three mos.: 8/6/09: $13.07 Summary of technical analysis & charts : December 2009 Sally Dreibelbis Fienup 32 Summary of technical analysis & charts The chart above shows 52-week price history Highest price in past 52 weeks: 8/28/09: $17.26 Lowest price in past 52 weeks: 2/20/09: $7.84 This is a $9.42 range. The stock is currently trading at the high end of its 52-week range. Financial Ratio Analysis : Financial Ratio Analysis (Based on Dell’s report ended July 31, 2009) Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 34 Financial Ratio Analysis Short-term solvency, or liquidity, ratios Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 35 Financial Ratio Analysis Long-term solvency, or financial leverage, ratios *Used “total liabilities” figure for “total debt.” Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 36 Financial Ratio Analysis Asset utilization, or turnover, ratios *Used “cost of revenue” figure from DELL’s Income Statement for “cost of goods sold.” **Used “total revenue” figure from DELL’s Income Statement for “sales.” ***Used “net receivable” figure from DELL’s Balance Sheet for “accounts receivable.” Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 37 Financial Ratio Analysis Profitability ratios I used annual data ended 1/30/09 for these three formulas, not quarterly data. Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 38 Financial Ratio Analysis Market Value ratios *Book value per share = Total shareholders equity/Total shares outstanding Financial Ratio Analysis : December 2009 Sally Dreibelbis Fienup 39 Financial Ratio Analysis ROE using the extended Du-Pont Analysis Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 40 Time Series Analysis of DELL’s ROE ROE for DELL over the last 3 years Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 41 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 42 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 43 Time Series Analysis of DELL’s ROE Time Series Analysis of DELL’s ROE : December 2009 Sally Dreibelbis Fienup 44 Time Series Analysis of DELL’s ROE Cross-sectional analysis for DELL : December 2009 Sally Dreibelbis Fienup 45 Cross-sectional analysis for DELL Cross-sectional analysis for DELL : December 2009 Sally Dreibelbis Fienup 46 Cross-sectional analysis for DELL Earnings Per Share And Cash Flow Per Share For DELL For FY 2010 : December 2009 Sally Dreibelbis Fienup 47 Earnings Per Share And Cash Flow Per Share For DELL For FY 2010 Economic analysis : December 2009 Sally Dreibelbis Fienup 48 Economic analysis Recessionary period Dell should expect below average (time trend) growth Lower risk appetite could negatively impact R&D Company analysis : December 2009 Sally Dreibelbis Fienup 49 Company analysis Dell had a very tough first quarter ended May 2009 Perot Systems purchase will impact DELL in the long term positively, but in the short term, may cause for some logistical concerns and loss of focus Analyst’s prediction of revenue of $51.6568B in 2010, a decrease of approximately 16%, was a little extreme Discount rate : December 2009 Sally Dreibelbis Fienup 50 Discount rate Capital asset pricing model (CAPM) The required or expected return, E(Ri), according to CAPM is E(Ri) = Rf + βi [E(Rmkt) – Rf] Rf = risk free rate = .0035 = .35% (U.S. T-bill) Dell’s beta = βi = 1.36 Rmkt = market-wide stock returns = 12.3% (historic S&P 500 index return) Discount rate : December 2009 Sally Dreibelbis Fienup 51 Discount rate E(Ri) = Rf + βi [E(Rmkt) – Rf] E(Ri) = .0035 + 1.36[.123 – .0035] = .16602 = 16.602% for DELL I am going to say that 16.602% is the expected return on DELL stock if the economy is in a boom situation. Discount rate : December 2009 Sally Dreibelbis Fienup 52 Discount rate Capital asset pricing model (CAPM) I will say that the expected return on the market in a recessionary economy is -12.79%. This is the average loss in a down year between 1926-2006 on large company stocks. Rmkt = market-wide stock returns = -12.79% E(Ri) = Rf + βi [E(Rmkt) – Rf] E(Ri) = .0035 + 1.36[-.1279 – .0035] = -.1752 = -17.52% for DELL in a recession Discount rate : December 2009 Sally Dreibelbis Fienup 53 Discount rate Capital asset pricing model (CAPM) If there is a 40% likelihood for a recession economy and a 60% likelihood for a boom economy E(Ri) = .40(-17.53%) + .60(16.602%) = 2.94% expected growth in Dell’s stock price Risk premium : December 2009 Sally Dreibelbis Fienup 54 Risk premium Risk premium = Expected return – risk-free rate = 2.94% – .35% = 2.59% Valuation based on Discounted Cash Flow : December 2009 Sally Dreibelbis Fienup 55 Valuation based on Discounted Cash Flow Fair value of the time series of future cash flows is computed as P0 = D1 / (R-g) Dell does not pay dividends, so we will focus on using the Price Multiples Valuation Method Valuation based on Price Multiples : December 2009 Sally Dreibelbis Fienup 56 Valuation based on Price Multiples P/E multiple tells us how much investors are willing to pay for every dollar of earning Estimated at 15.27 for company (not forward looking), 15.04 for sector, and 15.98 for market. The average of those P/E benchmarks is 15.43. I did not include the average industry P/E Fair price P0 = EPS1 * P/E1 = $2.28 * 15.43 = $35.18 for DELL Recommendation : December 2009 Sally Dreibelbis Fienup 57 Recommendation Dell is currently below my calculated fair value. Therefore, Dell is a “BUY.” Chief risks/assumptions made during this analysis Dell will quickly implement their pledge to cut costs to adjust to the recession. Efficient launch into the mobile market in 2010. Continued focus on the faster-growing netbook product line. Effective incorporation of Perot Systems into Dell’s already functioning operations. Recommendation : December 2009 Sally Dreibelbis Fienup 58 Recommendation Based on my analysis of Dell, I would rate this as a BUY for investors with a moderate to high risk tolerance Appendix : December 2009 Sally Dreibelbis Fienup 59 Appendix Income statement – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 60 Appendix Income statement – annual Appendix : December 2009 Sally Dreibelbis Fienup 61 Appendix Balance sheet – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 62 Appendix Balance sheet – annual Appendix : December 2009 Sally Dreibelbis Fienup 63 Appendix Cash flow – quarterly Appendix : December 2009 Sally Dreibelbis Fienup 64 Appendix Cash flow – annual