Dell is a leader in PCs. How a spin-off could unlock the value of the stock.

Many investors have paid


Dell Technologies

little attention in recent years. It’s time to take a fresh look.

The indifference stems from a $ 24 billion debt buyout in 2013, when founder Michael Dell, pictured above, privatized the company – cheaply, critics say. A return to the public market in 2018 received a mixed reception, thanks to a convoluted deal structure and heavy debt.

Today, Dell Technologies (ticker: DELL) is set to become much more attractive to investors as it prepares to sell its valuable stake in the software maker.


VMware

(VMW) in early November.

Dell will come out with a strong balance sheet and a simpler structure. This will allow investors to gain direct exposure to one of the world’s leading manufacturers of tech hardware at a great price. With annual sales of over $ 90 billion, it is a leader in personal computers, servers and storage devices.

“The VMware transaction is expected to unlock some of Dell’s value,” said Simon Leopold, analyst at Raymond James. “It creates a more streamlined narrative and an easier to understand story.”

Company / Teleprinter Recent price Modification of the current fiscal year 2021E EPS 2021E P / E Dividend yield Market value (bill) 2021E Revenue (bill)
Dell Core Technologies $ 51.00 * N / A $ 6.09 8.4 2.50% $ 39.80 $ 94
HP Inc. / HPQ ** 26.48 8% 3.74 7.1 2.9 30.5 62
Hewlett-Packard Enter / HPE ** 14.72 24 1.93 7.6 3.3 19.3 28
Cisco / CSCO Systems *** 54.62 22 3.43 15.9 2.7 230.4 53

NA = Not Applicable * Implicit core business price excluding value of VMware participation; the fiscal year ends in January 2022; projected dividend yield. ** End of year in October. *** Estimates for July 2022. E = estimate.

Sources: FactSet; JP Morgan

Dell shares recently traded around $ 106, but about half of that price is attributed to Dell’s 81% stake in VMware. price of $ 152, which leaves them with a “Dell core” worth around $ 51.

Core Dell, which is expected to have a market value of nearly $ 40 billion, is where much of the opportunity lies. The stock is effectively trading for just eight times the projected earnings of about $ 6 per share for the company’s fiscal year ending in January. (Dell’s consensus estimate of $ 9 per share now includes its share of VMware earnings.)

Samik Chatterjee, analyst at JP Morgan, says the low “valuation could be a catalyst for Dell”. He says he has better prospects than his rivals


HP Inc.

(HPQ) and


Hewlett Packard

Businesses (HPE), which have similar price-to-earnings ratios.

And Dell is negotiating half of the P / E multiple of


Cisco Systems

(CSCO), whose earnings growth outlook is comparable. Chatterjee has an overweight rating on the stock and a price target of $ 67 on the Dell Core.

In September, Dell unveiled annual sales growth targets of 3% to 4% for the next four years and more than 6% annual growth in earnings per share. It’s far from spectacular, but on par with what the power and utilities generate, and they’re trading for double Dell’s implied multiple.

Chatterjee views Dell’s advice as cautious and sees single-digit annual growth in earnings. It forecasts “base” earnings of $ 6.09 per share for the current year ending in January (what Dell calls fiscal 2022) and $ 6.55 next year. His view is that Dell can trade for 10 times the profits, a valuation barely rich at half the market multiple.

Investors can wait until the VMware spin-off to consider buying Dell or buy the shares now and own or sell the VMware shares they will receive in the spin-off. Dell has yet to set a date for the spin-off.

Dell owners will get about 0.44 VMware share per Dell share. The estimated derivative value of about $ 55 for each Dell share is determined by multiplying 0.44 times an adjusted price of $ 125 per share on VMware. This is the recent VMware share price of $ 152, less a dividend of about $ 27 per share that VMware will pay to its holders and directly to Dell, not to Dell holders.

VMware is much cheaper than inventory subscription software like Salesforce.com (CRM). It is trading at around 21 times the projected earnings for the current year, but its growth is slower and faces more and more challenges as businesses move their IT needs to the cloud.

Dell’s recent results have been strong, supported by a robust market for PCs. Revenue increased 15% in its quarter ending July and adjusted profit increased 17%. It has two main divisions: the Client Solutions Group (PC) and the Infrastructure Solutions Group (Servers and Storage).

One question about Dell’s outlook relates to the health of the PC industry, which has received a big boost from people working from home during the pandemic. “We are seeing another head start commercially, even as the consumer sector moderates,” says Chatterjee of JP Morgan. Dell is the industry leader in premium PCs for business buyers.

Dell’s core gross debt, excluding its financial unit bonds, is expected to drop to around $ 20 billion after the VMware spin-off. Dell’s net debt (debt minus cash) could end 2021 at nearly $ 5 billion, and it has long sought higher-quality credit ratings from two major agencies.

This will allow the company to initiate an annual dividend of around $ 1 billion in its fiscal year starting in February for a return of around 2.5%, based on the current Dell Core implied price.

This could attract income-oriented funds. He also unveiled a $ 5 billion share buyback program. Chatterjee is forecasting around $ 2 billion in annual buybacks.

A repurchase would reduce a relatively small free float by about 38% of its approximately 765 million shares outstanding. CEO Michael Dell controls around 50% and investment firm Silver Lake, which participated in the 2013 buyout, owns 12%.

Then there is the Michael Dell factor. Many shareholders — and Barron– criticized it about Dell’s LBO, and then when Dell bought out the holders of Dell follow-up stock for VMware in 2018. That deal allowed Dell to go public.

One problem now is that Dell has a two-class structure: Michael Dell owns voting shares with 10 votes per share. Some investors would like to see Dell move to a single one-vote share class, as VMware will after the spin-off.

“And why is it necessary, if ultimately you control the majority of economic interests, to have such a structure in place? Toni Sacconaghi, an analyst at Bernstein, asked the CEO of Dell earlier this year.

(Dell executives declined to comment for this article.)

Getting rid of this structure would allow Dell to be included in the S&P 500 index, which does not admit double-class companies. Michael Dell rejected the idea, saying he had “no intention” of collapsing share classes.

It’s a slight negative. More importantly, investor interest is now aligned with that of Michael Dell in an underrated and low valued company.

Write to Andrew Bary at [email protected]


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