Dell Inc. (
) is a hotly contested stock, with investors volleying back and
forth whether it is a value or a value trap. If, as rumored, a
private equity firm takes the PC-maker private, neither side
actually wins per se, though some Gurus will make out better than
others. Mere rumor of a private-equity buyout has lunged Dell's
share price about 18% this week to $12.84 a share in afternoon
trading. Private-equity buyout offers often occur when a stock is
being undervalued by the market, a view in line with several
Gurus who bought Dell at cut prices.
wrote in his July 2012
Oakmark Fund Commentary
"Today we are focused on the growth of Dell's non-PC businesses,
whereas investors are worried about declining sales of PCs, a
division we don't think we are even paying for. In each case, if
we are right, the fundamentals will force investors to reevaluate
their prejudices, and we will profit from the repricing of the
in a 2012 presentation commented:
"Summary: Of everything they own, they measure on the intrinsic
value of the business, and on that front Dell (
) has blown away all expectations. They are organically growing
in the 20s; bears are focusing on the metric they want to, that
revenue growth is low. Southeastern does not care about that.
Most relevant is that they are growing profits. They are not
worried about it at this point. Dell has evolved from a PC
business to becoming the IBM (
) for small and medium-sized businesses, domestically and
globally. It sells for cheaper multiples than IBM and we believe
it will outgrow IBM in the next decade. "
Several Gurus who found the company undervalued, however, bought
too early. Dell's stock plunged to under $10 per share at the end
of December, before the surge to today's $12.82. Wallace Weitz
for instance paid on average $13.16 for a piece his shares since
2008, which he began buying before 2008.
Mason Hawkins may have a harder time profiting. The largest Guru
holder of the company, his Southeastern Asset Management paid
$14.83 per share on average since 2008 for his more than 130
million shares, or enormous 7.5% stake in the company. He also
began building his holding before 2008.
Before 2008, Dell's stock price soared into the $20s and $30s,
meaning if the investors bought the majority of their positions
at those prices, the private equity company's buyout price will
have to be that high or higher for them to make a profit. If it
is lower, such investors could face permanent capital loss.
DELL data by GuruFocus.com
Prem Watsa's situation is similar, but he bought the majority of
his stake after 2008, though his average purchase price is still
$14.30 per share. Recently, theFairfax Financial investor made
another large investment in troubled technology company Research
In Motion (
), whose turnaround he is expecting to take time.
Gurus who bought into Dell more recently, when the price fell to
near-decade lows, may have chosen the best timing. Michael Price
for instance purchased a parcel of shares in the second and third
quarter of 2012 for $13 per share on average.
Likewise, Brian Rogers bought 14 million shares at the same time
for the same average price. Other Gurus who bought shares in the
second and third quarter include Ray Dalio, Tom Gayner and Dodge
Gurus who completely exited their positions in the stock of
course have no chance of profiting if the purchase price is
higher than theirs, but also no risk of permanent loss if it's
not. Notably, David Einhorn lost hope and money with Dell shortly
after purchasing 14.1 million shares for an average of $15.35 in
the fourth quarter of 2011.
In his second quarter 2012 letter he wrote:
) proved to be a disappointment. We had thought that the growth
in the non-PC business would be enough to offset the
deterioration in the PC business. The non-PC growth was smaller
than we'd hoped and the PC deterioration was worse than we'd
anticipated. While DELL has a good balance sheet, it appears
likely that management will try to use much of the cash to try to
buy its way into better businesses. At a minimum, this will erode
some of the value cushion that the cash balance creates. We
exited with a loss."
Though Dell grew its top line at a rate of 10.6% annually for the
past ten years, weaker PC sales are hobbling business. In its
fiscal third quarter 2013, the company reported an 11%
year-over-year drop in revenue to $13.7 billion, on slower
desktop and mobility sales.
To offset the trend, Dell has been shifting its business to more
service and storage offerings and making acquisitions. It bought
Quest Software and two other companies in the past several
There is no word yet on whether a deal will officially take
place. Private-equity investor and Guru Wilbur Ross told CNBC on
Tuesday that the buyout had a "50-50 chance" of taking place.
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