Dell updates

I wouldn't say that Dell has been performing off late but it is undergoing an overhaul as led by founder and CEO , Michael Dell right now and is sure worth a second look.

The most recent announcement states that it will cut approximately 10% of their work force. 10% of the workforce would amount to 8800 jobs. Based on 8800 jobs, assuming each job pays USD 2000 a month, the jobs cut will effect a savings of $211,200,000 a year. Do take note that this is just a proxy to how much they can save. $2000 per month may be either too high or low a figure and may not be accurate. Despite this, some analyst have done some figures and claim that the 8800 job cuts can help the company save approximately 600 million per year. Based on such claims, the assumption is that each worker in Dell earns on average $5681.81 per month.
Whatever the assumption, i am sure you do get the picture, Dell's restructuting efforts will lead to cost savings which in turn will lead to better profit after tax figures asumming other factors constant.

Using 2006 fiscal year financial statements, Dell had an EBIT of 4.3 billion approximately. Projecting a growth of 15%(I am being ultra conservative as 22% is the CAGR for the last 3 years) from 2006, 2008's EBIT would be approximately 4.9 billion and with a 200 million savings and 1 billion in taxes would produce a net income of approximately 4.1 billion compared to 2006 income of and its eps will be approximately $1.80 with 2.27 billion shares outstanding.

With a current PE of approximately 20, it should trade at a price of conservatively $36 in 2008.

With the more aggressive assumption of 600 million in cost savings a year, its 2008 net income would be 4.9 billion + 600 million - 1 billion in taxes = 4.5 billion in net profit after tax and its eps would be approximately $2.

Currently trading at a PE of 20, it should trade at $40 in 2008.

However, i do have to disclaim myself that these figures are ball park figures and will not be accurate and this is the quick and dirty method of calculating target prices. If you want figures with greater accuracy, do try to work it out on a spread sheet.The most important thing is that when it comes to financial modelling, do try as best as possible to be conservative. In my opinion, using a dcf analysis, it should trade at around $35 - $42. And Manpreet and I agree that barring any unforseen circumstances, the catalyst is Michael Dell and his new found strategies.

And finally, one point to note is that Mason Hawkins a value manager is a substantial shareholder holding greater than 5% of the company.

Do your own homework ladies and gentlemen. You might find yourself disagreeing with me.