Dell: Earnings May Hint if PC Giant Moving More Upscale

Shares of Dell, the No. 2 PC maker, rose slightly Monday, ahead of the company's third-quarter earnings report scheduled for Tuesday. Investors await news on Dell's moves upscale as well as supply shortages caused by floods in Thailand.

Dell traded at $15.42, up 7 cents in midafternoon. The shares have risen nearly 4 percent in the past three months but have gained almost 14 percent this year.

Analysts expect the Round Rock, Tex.-based direct-order PC pioneer to report earnings of 47 cents a share on revenue around $15.65 billion, compared with 2010's earnings of 45 cents on revenue of $15.4 billion, FactSet Research estimates.

Although the pace of PC shipments is easing compared to the sizzling arc for smartphones and tablets, there may be some signs Dell's results may beat the estimates.

One is that its printers partner, Lexmark International, previously reported third-quarter results that exceeded estimates. CEO Paul Rooke told IBTimes the relationship between Lexmark and Dell was outstanding.

After it abandoned its own try to beat No. 1 PC maker Hewlett-Packard in printers, where it's also No. 1, Dell and Lexmark have focused heavily on enterprise sales.

During the third quarter, PC and server buyers may have hesitated while HP mulled the future of its PC business and switched to Dell. Only last month, just before closing its own fourth quarter, did new HP CEO Meg Whitman announce the PC business would be kept.

As well, several bellwether technology companies, such as IBM, Cisco Systems and Nvidia have also beaten estimates, which could bode well for Dell.

Analysts generally expect a favorable report, watching for profitable outcomes including a boost in gross margins from last quarter's 23.3 percent, cash flow and outlook for the fourth quarter, traditionally Dell's busiest.

Peter Misek, analyst with Jefferies, said he believes the corporate cycle to upgrade PCs is slowing along. As well, managers might want to defer orders until Dell partner Microsoft delivers Windows OS 8 next year.

But Misek and other analysts, like Mark Moskowitz, with JPMorgan Chase, think Dell's focus on services might add earnings potential.

Dell acquired Perot Systems for $3.9 billion in 2009, to move more into the computer services business. Founded by Electronic Data Systems founder H. Ross Perot, the two-time presidential candidate, the Plano, Tex.-based company competes against EDS, now a part of HP, as well as with IBM in the enterprise services sector.

As well, founding Chairman Michael Dell, 49, may also shed light on the impact floods in Thailand have had on Dell's incoming components, including disk drives.

Because of its size and expertise with the supply chain, Dell may well have ordered and received ample stocks ahead of the flood. However, because its Asian factories in Malaysia and China, among others, run on lean inventories, they could be caught short.

Finally, another barometer will be Dell's cash and investments, which were $16.18 billion last quarter. Besides repurchasing shares, Dell makes acquisitions, having just completed the purchase of Force10 Networks for a reported $700 million, which bolstered its products in the data center and switching sector against Cisco and HP.

While its own tablet, the Dell Streak, has not been a hit in the market, investment bankers for months have suggested Dell might acquire Research in Motion, the BlackBerry and BlackBerry PlayBook developer, to get more into the market for portable devices and tablets.

Acquiring RIM, though, might be a monumental battle and put Dell into a different sector from the one it knows best.

RIM, based in Waterloo, Ontario, has already watched as activist investors including Toronto's Victor Alboini and New York's Leon Cooperman have bought into the company. RIM's market capitalization is now $9.6 billion and its enterprise value is $8.48 billion.

Meanwhile, Dell's market capitalization is now $28.2 billion. Its enterprise value is $20.6 billion.