Dell's 2008 annual 10-A report begins with the following introduction to the company that explains the main features of it business model.
Dell listens to customers and delivers innovative technology and services they trust and value. As a leading technology company, we offer abroad range of product categories, including desktop PCs, servers and networking products, storage, mobility products, software and peripherals, and services. According to IDC, we are the number one supplier of personal computer systems in the United States, and the number two supplier worldwide.
Our company is a Delaware corporation and was founded in 1984 by Michael Dell on a simple concept:
By selling computer systems directly to customers, we can best understand their needs and efficiently provide the most effective computing solutions to meet those needs. Our corporate headquarters are located in Round Rock, Texas, and we conduct operations worldwide through subsidiaries. When we refer to our company and its business in this report, we are referring to the business and activities of our consolidated subsidiaries. We operate principally in one industry, and we manage our business in three geographic regions: the Americas; Europe, Middle East and Africa; and Asia Pacific-Japan.
A. Review the reformulated statements and calculate the key measures that will help you forecast for 2009 and beyond. These should include sales growth and core profit margins. Calculate residual operating income over past years and assess how well Dell has added value for shareholders. (You may go to earlier years to get a fuller history.)
B. What are the main drivers of Dell's residual operating income?
C. When Dell's stock price stood at $10 in 2008, analysts were forecasting revenue of $65.1 billion for 2009 and $65.7 billion for 2010.With these forecasts and information you have garnered from the financial statements, develop a pro forma that would justify a price of $10 each for Dell's 2,060 million shares. What aspects of the pro forma are you most uncertain about?
D. Does your pro forma suggest that the $10 price is cheap? Would you recommend buying the stock at this price?