Q2 Preview: Dell (DELL) May Benefit from Continued PC Strength; Margins Still in Focus

Shares of PC giant Dell Inc. (Nasdaq: DELL) are trading higher this afternoon heading into its second-quarter earnings report.

After the market close Tuesday, Dell is expected to report earnings of 49 cents per share on revenue of $15.76 billion. Earnings at 49 cents would be an 11 percent drop from last quarter's 55 cents per share, but a 75 percent gain from 28 cents per share reported in the same period last year. According to data from Streetinsider's Earnings Insider, Dell has topped views about 36.6 percent on average over the last three quarters.

Shares of Dell gained about 5 percent through the quarter and are down 3.4 percent since. The stock is 16 percent higher on the year. Dell has traded in the range of $11.34 to $17.60 over the last 52 weeks.

In its second-quarter, peer IBM (NYSE: IBM) reported earnings of $3.09 on revs of $26.70 billion, both beating views. IBM saw strong growth in the Americas, and boosted its fiscal 2011 EPS outlook. However, IBM hasn't sold a PC in many years, focusing more on IT sales and service. It still may be a positive indicator that mature markets are beginning to open up their wallets again.

Data from Bloomberg has analysts positive-to-neutral on shares; 19 have a Buy rating, 18 recommend to Hold, and 4 suggest to Sell. The analyst price target average is $18.50, with a low of $12 and high of $25.

Notably, traders may also want to keep their eyes on CommVault Systems (Nasdaq: CVLT), SMART Modular Technologies (Nasdaq: SMOD), Xyratex Ltd. (Nasdaq: XRTX), Lexmark International (NYSE: LXK), and QLogic (Nasdaq: QLGC), all of which derive about 10 percent of total revs from Dell.

Analyst Insight

• Goldman Sachs is going into the quarter with a Sell rating on Dell. Earnings are expected to be 53 cents on revenue of $15.90 billion, with gross margin of 22.5 percent. "We’ve been cautious on Dell based on our belief that the company’s recent gross margin expansion may be fleeting in a more normalized PC pricing and component cost environment. Nevertheless, both PC ASPs and component costs have been more favorable than we anticipated throughout the year, and this should once again allow Dell to post solid margin and EPS upside in its July quarter..." Also, though macro issues may continue to compress component costs, a more aggressive PC pricing environment may emerge as well.
  
  
• Wells Fargo is modeling for earnings of 46 cents on revenue of $15.8 billion. Wells also has a few macro concerns, stating, "We think weak consumer PC results will be offset by healthy demand trends in servers, and business PCs. Additionally, we expect currency gains to add 2 points to growth. Considering the slowdown in the economy in July, we aren't looking for material outperformance in the quarter. As sentiment on IT spending has deteriorated over the last month, we expect the company to be conservative with guidance for the remainder of the year." Gross margin should come in at 21.5 percent, according to Wells.
  
  
• Deutsche Bank expects earnings of 44 cents on revenue of $15.8 billion, with gross margin of 21.5 percent. "We believe margins benefited from favorable product mix (healthy corporate demand/softer consumer), benign commodity prices and greater contribution from Dell’s higher margin Storage offerings (i.e. Dell owned IP)...We expect weak Consumer PC demand to modestly pressure Dell revenues." Keys to watch include government spending, enterprise demand and upgrades, as well as Dell's PC demand outlook.
  
  
• Collins Stewart sees earnings of 51 cemts per share and gross margin of 22.3 percent. "...ongoing PDR checks on tech demand suggest that it’s still business as usual. The areas of strength remain storage, servers & software. Obviously, networking and services are dragging a bit." Collins picked up a little weakness in Federal spending, "but that was for the month of July which is usually soft, vs. August and September which are the last two months of the Federal fiscal year, where its typically use-it-or-lose-it."
  
  
• Bream Murray is looking for revs of $15.91 billion and earnings of 51 cents per share, with gross margin of 22 percent. "We believe DELL (gross margin upside) [has] company specific circumstances that can ultimately offset some degree of macro demand softness at these levels...generally speaking, our overall demand checks for PC's and enterprise spending have been relatively in-line with expectations."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release.

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