Q4 Preview: Pricing Power Could Work in Dell's (DELL) Favor; Margins to Be Focus

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DELL Hot Sheet

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Dell (Nasdaq: DELL) shares are getting some extra attention from investors and traders Tuesday ahead of its fourth-quarter 2012 report.

The Street is currently expecting Dell to produce just about a 2 percent year-over-year gain in EPS to 52 cents, while revenue should rise 1.5 percent to $15.96 billion. Over the last five quarters, Dell has beat expectations by an average of 24.1 percent and topped last year's views by 43.2 percent.

Shares moved 9 percent higher in the quarter, and are up 6 percent so far in 2012. Dell has traded within a range of $13.29 to $16.36 over the last year, hitting the 52-week high just last Friday.

21 analysts have a Buy rating on Dell, 13 are at Hold, and four maintain a Sell. The analyst price target average is $19, with a low of $19 and high of $25.

Notably, implied volatility is about 40 percent, which compares with the historical volatility level of 14.8 percent.

Analyst Comments

Goldman Sachs is looking for EPS of 47 cents and revs of $15.979 billion. Goldman noted the bear case on Dell is its ability to sustain calendar 2011 gross margin improvements, which Goldman backs. Bulls on Dell think the PC business has improved its cost structure "and this coupled with the steady shift towards higher-margin enterprise solutions has triggered a re-rating of long-term gross margins and earnings power."

Goldman thinks Dell took advantage of Hewlett-Packard's (NYSE: HPQ) weak quarter and had more lower-cost HDD inventory.
Brean Murray Carret is looking for EPS of 50 cents and revs of $15.77 billion. Though Brean sees the potential for stronger-than-expected operating margins and PC gains, the firm still thinks recent stock price gains might pare unless some great guidance is issued.

Questions Brean says still linger for Dell include:
- Structural OM's vs. component ASP impact;
- Trajectory of its enterprise]IP centric business model transition; and
- Valuation of a company with low single]digit revenue growth, improving structural OMs and strong cash flow generation.
JPMorgan sees EPS of 56 cents and revs of $16.058 billion. For the somewhat near-term, JPMorgan sees Dell's "revenue pruning" coming to a halt in the next three to six months, leading to better growth in the back-end of 2012 and straight through 2013.

Another key point is Dell's ability to sustain its gross margin despite the industry looking for compression on higher input costs. JPMorgan likes Dell's ability to compete in the integrated storage market.
Wells Fargo is modeling EPS of 47 cents and $16.1 billion in revs, saying the company had a "normal seasonal" quarter. Wells is also bullish on Dell gaining market share, but cautions that gains could be offset by competitive pricing and lighter server revs.

The firm commented, "We believe that Dell is taking the right steps to improve overall growth and profitability, and that they are executing well on their stated cost reduction and product realignment around solutions and services, as they strive toward bringing a set of integrated systems to their business customers. However, we think Dell still has more work to build out its enterprise IT solutions stack, and in the interim are concerned that they may be running out of alternative differentiators in the commodity PC market."
Deutsche sees overall strong results as the firm's latest checks indicate enterprise IT spending gained momentum through 2012 as economic views improved. For the quarter, Deutsche sees EPS of 50 cents and revs of $16.1 billion. Deutsche said, "We expect Margin upside to be driven by favorable product mix (healthy corporate demand/ softer consumer), benign commodity prices and greater contribution from Dell’s higher margin Storage and Server offerings (DB at GMs of 22.5% vs. 23.1% in the prior Q). Looking forward, we expect Dell to highlight continuing activity around corporate upgrades and mix towards Dell owned IP (e.g. storage / networking etc)."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Dell's past performance at Streetinsider's Dell's Income Statement.

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