In the years of have been trading and interacting with other investors of all kinds, I have found that acquisitions can be a source of tremendous excitement; more importantly they can be a breeding ground for horrendous mistakes, especially by retail investors.
Activist investors like Carl Ican, T. Boone Pickens, Daniel Loeb and others make a good portion of their living through the various processes of mergers, acquisitions and liquidations. Their actions or even intentions alone can motivate thousands of ill-prepared investors to “coattail” these trades in an effort to capitalize on what they believe could be a home run. But more often than not it’s either too late or the process turns out to be a long drawn out one in which the investor bails on as their patience and pockets run thin.
Dell Inc. DELL has been at the center of a flurry of buyout activity and is attracting speculators even though their profits are slipping away faster than a 16 cylinder Bugatti Veyron burns fuel at full throttle (you’ll get about 1 mile per gallon).
While I believe that DELL will most likely go private, it’s my bear of the day because their fundamentals are going in the wrong direction, analyst are jumping ship (on earnings growth estimates) and I don’t think that even the great Carl Icahn can improve the situation in short order.
More importantly, you should see the caution flags here and heed them unless you are expert in merger and acquisition analysis. For most investors, it might be a better move to avoid Zacks Rank 5 Dell Inc and look to companies with better ranking and positive earnings growth like Apple AAPL, Google GOOGor Qualcomm QCOM, all of which are rated better than Dell.
Bidding Battles
Michael Dell wants to take the world’s number 3 PC maker private for $24.4 billion. It’s his belief that a needed transformation within the company would be done best without the meddling, scrutiny and intrusiveness of the public markets (I agree here).
Michael Dell and Silver Lake agreed in February to buy out shareholders at $13.65 a share; shares were trading at just over $10 at the time and had traded as low as $8.69 in November.
Icahn and Southeastern Asset Management (another major shareholder) are fighting Dell’s buyout offer, saying it’s too cheap for a company trying to become a major provider of enterprise computing. They are proposing new leadership and additional cash or stock for shareholders (obviously they own shares much higher). They drew up a deal where shareholders have the option to either receive $12 per share in cash or $12 in additional shares valued at $1.65 per share.
Earnings Aches
DELL recently reported that net income fell to $130 million from $635 million a year earlier. Excluding certain items, income was down 51 percent to $372 million, or 21 cents a share, from $761 million, or 43 cents a share, a year earlier.
They missed the Zacks Consensus by 38.35%, expectations were for 34 cents in the quarter.
Margins on a GAAP basis slid to 19.5 percent from 21.3 percent a year earlier, as total operating expenses climbed 12 percent.
Revenue in its fiscal first quarter ended May 3 fell to $14.1 billion, higher than the average analyst estimate of $13.5 billion.
Shares are currently trading at 13 times forward earnings assuming flat sales growth and an earnings increase of 2% in 2013. Looking at the trajectory of analysts’ expectations, I think that might be a stretch.
Being that Mr. Icahn rode Netflix NFLX stock up135% for an over $800 million in estimated paper profits; one would think that he might want to just let this one (DELL) go. Based on past experience it’s not his style to just walk away, but for most of you reading, that might be the best medicine here.
If you are looking for a turnaround, you might have a better shot exploring Hewlett-Packard HPQ, although I’d wait for a pullback as its shares have already risen by leaps and bounds.
Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”. You can discover more of his insights and recommendations through his two portfolio recommendation services:
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