I am bullish on Dell Technologies (DELL) because the cash flows are too good to ignore, and the company plans to distribute capital to shareholders. Although the company has posted a solid quarter regarding earnings, headwinds still linger, causing hesitancy among investors. (See Analysts’ Top Stocks on TipRanks)
Company Overview
Dell Technologies sells information technology products and services worldwide. The three segments the company operates in are Infrastructure Solutions Group, Client Solutions Group, and VMware.
Future Outlook
Dell’s Q3 earnings beat market expectations, but the company’s recent quarterly performance is mixed. Dell’s earnings growth was not as stellar due to component shortages impacting margins. Due to the pent-up demand caused by the supply shortages, the backlog of sales should translate to higher numbers in the fourth quarter.
In the third-quarter earnings call, Dell reported net revenue growth of 21%, and its non-GAAP earnings increased by 17% to $2.37 per share. Its price-to-earnings ratio is around 6x and provides a reason for a bullish rating. Cash flows remain solid and fuel the company’s next chapter as it prepares to distribute capital back to shareholders.
Dell reiterated its commitment that 40% to 60% of the adjusted free cash flow will be directed toward shareholders in the most recent earnings call. It currently has no dividend, but investors can expect around $0.80 per share based on the information presented.
Company Financials
The company’s financials have some positives and negatives. For starters, it has a very high debt to equity percentage of 338% and more short-term liabilities than short-term assets.
Despite the high debt to equity ratio, the interest payments are well-covered by EBIT at 3.1x coverage, and Dell’s price-to-earnings ratio remains attractive. Price-to-free cash flow is also attractive at 4x compared to HP’s at 7.45x.
Valuation
Considering multiple factors such as the price-to-earnings and price-to-free-cash-flow ratios combined with a future dividend expected in Fiscal Year 2023, Dell presents an interesting opportunity. Its revenues are growing, and free cash flows are strong.
I support a $65 price target. Dell stock seems to have been underappreciated by investors recently. Considering a decrease in cash flows to approximately $7.5 billion and discounting future cash flows by 8%, Dell’s future cash flows are still worth $65 per share without assuming any future growth.
Risks
Dell’s balance sheet has become a concern as it holds a lot of debt. Moving forward, some risks include weaker-than-expected free cash flow and lower-than-expected dividends.
An extension of the supply crisis will also hinder the company’s ability to produce results in the near term. If Dell cannot deliver products and freight costs remain elevated, the diminished sales and higher expenses will eat into the bottom line.
Wall Street’s Take
Turning to Wall Street, Dell Technologies has a Strong Buy consensus rating, based on six Buys and two Holds assigned in the last three months. At $62.36, the average Dell Technologies price target implies 13.4% upside potential.
Final Thoughts
Dell is growing in all the right areas, and solid cash flows and earnings outweigh the poor balance sheet. Moving forward, investors desire improvement with Dell’s short-term assets and anticipate a healthy dividend. Assuming the market behaves, Dell is likely to be a solid performer.
Disclosure: At the time of publication, Aaron Stine did not have a position in any of the securities mentioned in this article.
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