Dell's earnings rising, shares are rated 'buy'

Taking Stock

Your Money

February 29, 2004|By ANDREW LECKEY

I'm a 47-year-old conservative investor with shares of Dell Inc. in my individual retirement account. What's your opinion of this company?

- K.M., via the Internet

This personal-computer powerhouse, in second place in a nip-and-tuck sales race with Hewlett-Packard Co., saw its profits rise 24 percent in its fourth quarter.

It continues to thrive and enhance its marketing image despite difficult global economic conditions that have taken their toll on weaker competitors such as Gateway Inc.

More than half of Dell quarterly revenues came from desktop computer sales and 27 percent from notebook computers. It also enjoyed strong sales of printers, servers and storage products, while making inroads into the consumer electronics business with its DJ music player and flat-panel-screen televisions.

Dell builds computers to order and sells directly to customers, which eliminates the middleman and enables it to quickly pass lower component prices along to consumers.

This is tough on the competition and should continue to be a successful game plan as it expands its line of products into consumer electronics.

However, rival Hewlett-Packard remains stronger in retail stores and in corporate deals. While H-P moved into first place in the fourth quarter, Dell led in sales for the full year.

The company formerly known as Dell Computer expects steady growth in technology spending this year. Businesses are regaining their health and becoming more willing to purchase equipment, with smaller businesses leading the way, according to Chief Executive Officer Michael Dell.

Industrywide, the fourth-quarter worldwide shipments of PCs grew at the fastest rate in three years, thanks to strong holiday PC sales and increased purchases by businesses, according to research by International Data Corp. and Gartner Inc. Yet the PC market is mature and saturated, making it difficult for anyone to increase prices.

Dell (DELL) shares are down 1 percent this year, after gaining 27 percent last year. The company intends to increase its share buybacks this year.

The consensus rating on Dell stock from the analysts who track it is currently a "buy," according to the Boston-based First Call research firm. That consists of seven "strong buys," 14 "buys" and eight "holds."

Dell's earnings are expected to increase 26 percent this year, vs. the 21 percent gain predicted for the computer hardware industry. Next year's projected 21 percent gain for Dell compares with the 18 percent expected of its peers. The prediction of a five-year annualized growth rate of 15 percent beats the 12 percent industrywide forecast.

I've owned Royce Opportunity Fund for less than a year, and I'm considering investing more because of its great performance. What's the outlook for this fund?

- R.B., via the Internet

While its recent results are outstanding, they're largely because of the substantial rebound of many small- and micro-cap technology stocks that had been beaten down in the tech bust.

It will be difficult to continue this blistering pace in a field that traditionally has to contend with volatility. Furthermore, a major growth in assets such as this fund has experienced makes it more difficult to manage a portfolio of many small stocks.

The $1 billion Royce Opportunity Fund (RYPNX) is up 99 percent over the past 12 months to rank in the upper 2 percent of small value funds. Its three-year annualized return of 17 percent places it in the top one-fourth of its peers.

"We think its returns of the past five years are far beyond people's highest expectations for what a fund can deliver long-term," said Dan McNeela, analyst with Morningstar Inc. "Because this fund concentrates on the smallest stocks in the market, it's for someone who wants to add diversification to an existing large-cap portfolio."

Experienced portfolio manager Boniface "Buzz" Zaino, who spent 17 years with Lehman Brothers, has done a fine job since he was put in charge in 1998. He emphasizes undervalued asset plays, turnaround stories, undervalued growth opportunities and high growth potential.

Zaino holds a lot of stock names, trying not to concentrate on any one stock so he can minimize risk. The sizes of his positions typically don't exceed 1 percent of assets. Twenty-eight percent of the fund's portfolio is in hardware, with industrial materials accounting for 24 percent. Its other significant sectors are consumer services and business services.

Royce Opportunity Fund's top holdings were recently Unova, CTS, MEMC Electronic Materials, Orient Express Hotels, Warnaco Group, MacDermid, Vishay Intertechnology, Network Equipment Technologies, aQuantive and Westell Technologies.

This "no-load" (no sales charge) fund requires a $2,000 minimum initial investment and has an annual expense ratio of 1.17 percent.

My husband and I have $1.1 million in assets in managed accounts with a full-service broker. What are typical asset management fees?

- A.B., Chicago

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