Bears growl as one at Dell -- is it good time to buy?

November 29, 1993|By New York Times News Service

NEW YORK -- Short sellers have placed a huge bet against Dell Computer Corp., and most of Wall Street regards it as a company in trouble.

About 7.6 million shares of Dell, or roughly 30 percent of the shares in public hands, have been sold short in anticipation of further declines in the company's stock price.

And the analysts' opinions on Dell tracked by Zacks Investment Research Inc. are mainly "hold," which in Wall Street euphemism typically means sell. But there are also several "strong sell" ratings, a rare expression of investment aversion.

So much for the Greek-chorus consensus. It could be a good time to buy Dell shares, according to Daniel Benton, a portfolio manager at Dawson Samberg Capital Management Inc., an investment firm. Mr. Benton will be looking hard at Dell's fiscal third-quarter results, which it will report tomorrow.

If the company reports a break-even quarter or better, he said, Dell shares should rise because it would be a sign that the company was finally putting its problems behind it.

Besides, for the last three quarters, Dell has disappointed Wall Street, reporting results below the estimates of most analysts. The consensus estimate among 26 analysts who follow Dell, according to Zacks, is a loss of 3 cents a share.

And the estimates made in the last month have been more negative, forecasting a loss of 9 cents a share. Any result better than a 3 cents-a-share loss will be regarded as good news for Dell.

The positive case for Dell combines strong demand in the personal computer business with the assumption that the company has solved its manufacturing problems.

That should lead to a resurgence in gross profit margins at Dell, says Mr. Benton, who five times was the top-ranked personal-computer analyst in the annual Institutional Investor 11 magazine poll, until he became a fund manager earlier this year. Next year, he said, Dell would earn $2.35 a share, compared with a Wall Street consensus forecast of $1.56 a share.

Healthy personal-computer sales have given a boost to the stock prices of all the major producers in the last month. The shares of Compaq Computer and AST Research are flirting with 52-week highs, while even Apple Computer, which has its own troubles, and IBM, whose personal-computer unit makes up only one-sixth of its total revenues, have advanced smartly.

And Dell has benefited as well, moving into the mid-$20s. Shares of Dell fell 62.5 cents to $24.375, on Friday. Though an improvement, the price is half the level of just less than $50 that Dell reached in late January, before its troubles surfaced.

Dell's problems have been severe growing pains and a bungling of its notebook computer line. It was one of the fastest-growing companies in America last year, with sales more than doubling to $2 billion. But its management systems proved incapable of handling further growth this year.

Parts ordering went awry and it was stuck with too many desktop machines based on Intel's 386 microchip, when the market moved strongly to the more powerful 486 chip. Dell also fell out of step with the notebook market, leaving it with 386-based machines when the demand was for 486-based models.

The company was forced to take a big charge against earnings for excess inventory, and then another one when it announced it was temporarily pulling out of the notebook market. Dell is still trying to restart its notebook business, saying it plans to have an offering by the first half of 1994.

"Dell still hasn't solved its problems yet," said Eugene Glazer, an analyst for Dean Witter Reynolds Inc.

To be sure, the recovery at Dell, if it has begun, is in its early stages, and plenty of questions remain. But Mr. Benton and a few others said they saw positive signs, including a $225 million private financing arranged at the end of August.

Even without a notebook entry, sales are strong and expected to reach about $3 billion this year. And in September, Dell ranked first among desktop personal computer makers in the annual customer-satisfaction survey conducted by J.D. Power and Associates, a market research firm.

"Despite the view on Wall Street that it is a troubled company, Dell has never lost the loyalty of its customers," Mr. Benton said.

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