Every time I trash one of America’s favorite companies, I get loads of colorful e-mail messages from the stock’s fans. Never mind that they could have saved a lot of money by listening to me … their feathers get ruffled despite reality.
And so I’m prepared for another avalanche of nasty messages this week because I want to tell you about why I think Dell Computer — another of America’s widely-owned and widely-loved stocks — is headed for the gutter.
I can’t help myself. Just look at how many times Dell has stumbled in the last month …
Stumble #1
Poor Second-Quarter Results
The Wall Street crowd was caught off guard on July 21 when Dell warned that its second-quarter results would fall way, way short of profit and sales expectations. Instead of the $0.32 per share of profits that Wall Street was expecting, Dell warned that it would only make $0.21 to $0.23.
So when Dell officially reported its second-quarter results last week, it easily met its lowered expectations … by reporting a 51% year-over-year drop in profits. The problem, according to CEO Kevin Rollins, is that competition in the PC business is getting “more intense.”
More on that in just a moment. First, let’s talk about another thing that Dell discussed in its earnings release …
Stumble #2:
Accounting Hanky Panky
Dell informed investors that the Securities and Exchange Commission was conducting an informal investigation of Dell’s revenue recognition practices and other “accounting matters.”
The biggest surprise: It turns out the SEC has been checking into Dell’s accounting practices since August 2005, but Dell has kept it quiet until now. How come? “We are under no obligation to disclose it,” said company spokesperson Jess Blackburn.
So why disclose it now? My guess is that something ugly is about to come out of Dell’s compliance division in the near future. Stay tuned … I think this matter is far from closed.
Stumble #3:
Fire in the Hole
Apparently, it wasn’t enough for Dell to burn its investors; the company has also been burning its customers … literally!
Last week, Dell was forced to recall 4.1 million laptop batteries after charges that they were overheating and bursting into flames. The recall covers Dell-branded battery packs that use certain Sony Li-ion battery cells sold through July, 2006.
Dell swore that the recall would not “have a material adverse effect on its results of operations, financial position, or cash flows.”
Yeah, right! The recall will cost Dell about $200 million to $300 million.
Plus, the true costs of a damaged reputation and lost sales are incalculable.
This isn’t Dell’s first problem with batteries either. Dell recalled 22,000 notebook batteries back in October 2005. I think this latest round of recalls shows just how inattentive Dell has become.
Adding insult to injury …
Stumble #4:
Dell has been Ticking Off
Its Chinese Consumers
Everybody wants to grab a piece of the massive Chinese market and Dell is no exception. However, Dell is doing a horrible job of it.
Dell’s Chinese website misquoted the price of a Dell server, advertising it at 975.78 yuan vs. the correct price of 8,999 yuan. The pricing error created a frenzy of online orders, but, when the problem was discovered, Dell refused to sell the servers at the advertised price.
The customer reaction was severe: A few hired lawyers, while Dell lost credibility with Chinese consumers. The mis-pricing error simply reinforced the perception that U.S. companies have poor service and arrogant attitudes.
Dell was having enough trouble winning over Chinese consumers from Lenovo, Acer, and other Asian PC makers before this incident. Now, Dell’s future in Asia looks even dimmer.
I think the company’s executives agree …
Stumble #5:
Managers Jumping Ship
While Dell tries to win back Chinese customers, its managers are busy siding with the competition.
Last October, Foo Piau Phang, the co-president of Dell China, bolted to join Chinese-competitor Shenzhen HASEE Group.
Next, William Amelio, Dell’s Asia-Pacific and Japan president, quit Dell and joined Chinese computer giant Lenovo as CEO in December.
Then, just last week, David Miller, the other co-president of Dell China, resigned. He’s also expected to start working for Chinese computer giant Lenovo.
If people intimately involved with the business don’t have much confidence, why should investors? And the fact that these managers are going to companies like Lenovo makes perfect sense once you realize that …Stumble #6:
Dell’s Market Share Is ShrinkingDell’s share of the Chinese desktop market slipped from 8.3% to 7.5% quarter over quarter.Maybe the reason is that Dell’s direct-to-consumer model just doesn’t work in Asia. Not only do Asians prefer to do business face to face, they also like to feel and touch products before they buy them.The result: Dell’s biggest strength here in the U.S. is its biggest weakness in Asian.Less than two years ago, very few Americans had ever heard of China-based Lenovo. That instantly changed on December 8, 2004, when Lenovo announced the purchase of IBM’s PC division for $1.75 billion.IBM! This is the company that created the PC industry as we know it today.The purchase immediately transformed Lenovo into the third largest PC company in the world (behind Dell and Hewlett-Packard).Not bad for a company that was founded a mere 22 years ago by a group of ten Chinese professors … in a small cottage … with only $25,000 in start-up capital!Dell’s past success is largely because it managed to be the lowest cost producer of computers on the planet. Now, that low-cost shoe is on Lenovo’s foot.
It doesn’t matter whether you’re talking about PCs, shoes, shirts, steel, or cars. Goods produced in China are cheaper for the simple reason that Chinese wages are a fraction of those in the U.S.:
- Another 700 million earn less than $2 a day.
- In rural China, 250 million people earn less than $1 a day.
- On average, the annual income of China’s 1.3 billion people is about $1,800.
- On top of that, the typical Chinese factory worker puts in 10 hours a day, six days a week. That’s 60 hours — a whopping 50% more than their American counterparts.
How’s Dell going to compete against that? It can’t!
Consider These Steps
First, if you own Dell stock … DUMP IT, and you could save yourself from serious losses. Sure, Dell investors could have saved a lot more if they had heeded my warnings when the stock was still selling in the 40s or again in the 30s. But better late than sorry; I see Dell steadily falling below $10 in the next year or two.
Second, in terms of the big picture: Do NOT invest in any U.S. industry whose major competition comes from Asia. The PC industry, for example — just like steel, electronics, clothing, and footwear — is dominated by aggressive, hungry, and cheap Asian competitors that U.S. companies simply can’t beat.
Third, if you’re not already investing overseas, stop hesitating. As I’ve been telling you, there are a lot of huge growth stories in Asian countries. Stocks like China Life (LFC), CNOOC (CEO), and China Mobile (CHL) have been rising steadily. (For more info see my recent report on Asian stocks.)
Fourth, if you need protection — or if you have extra money to speculate with — look into put options on stocks that are falling. I explain how these work in “Intel Headed for $9 a Share!“
Best wishes,
Tony
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