Dell deserves a closer look Recommendation: BUY

Fair Value Estimate: $13.50

Margin of Safety: $10 - $18 Date: November 8, 2012 The key drivers for a long-term stock appreciation are: > A very conservative intrinsic valuation points to a fair value that is at least 30% higher than the current market price. (See valuation grid at the bottom of this note) > Stock price and EPS have diverged as compared to its peers > Even as consumer segment of the business slides, Dell is making strides in enterprise solutions space Risks: > Market continues to punish Dell for poor performance in the consumer segment > Poor stock performance leads to a negative feedback loop > Acquisitions eat up profits, fail to deliver expected growth and/or synergies. Stock Performance: Over the last few years, DELL has been performing poorly relative to its peer group. If theres any solace its that HP has been worse off. Based on just stock performance, signs are not encouraging yet with a long-term view our outlook is that DELL has tremendous upside even if it manages to hold on to its current revenue base.
TOSYY:Toshiba HPQ:Hewlett Packard LNVGY:Lenovo AAPL:Apple

Current Price: $9.50

1-year performance

3-month performance

Business outlook and Management: Dell is an enterprise play, just like Microsoft and more investors need to adjust their expectations that an increasing share of revenues and profitability will be driven by its performance in the enterprise segment.

Relative measures DELL 5.53 HP NMF Toshiba 15.34 Lenovo 17.71 Apple 12.33 EMC 20.02

PE

Price/Book ROE ROA EV/EBITDA Total Debt/Equity Cash/share

1.63 33.45% 5.61% 2.56 86.68 6.86

0.85 15.60% 4.72% 3.29 93.04 4.85

1.43 7.62% 2.24% 5.93 129.03 3.07

3.98 23.08% 3.03% 5.96 1.67 7.29

4.43 42.84% 23.61% 8.47 0 30.52

2.38 13.67% 7.15% 9.47 7.48 2.59

These comparisons highlight the fact that Lenovo/Apple/EMC are expected to have higher growth while DELL,HP and Toshiba are cheaper because the market expects them to have low or no growth in the coming years.

Price versus EPS overlay

Dell

HP

EMC

DCF Valuation: Weve taken a rather pessimistic view of revenue growth over the next few years, assuming that DELL continues to lose revenues especially in the consumer segment. Yet the intrinsic value is well over the current

A similar DCF analysis for HP and EMC reveals fair values that are much closer to the current market price. In summary: DELL looks undervalued at it current price levels and looks like a good candidate to initiate a buy.

Additional reading: > New enterprise head Marius Haas talks about plans for the enterprise segment: http://allthingsd.com/20121019/seven-questions-for-dell-enterprise-head-mariushaas-and-software-head-john-swainson/ > Dell investor relations blog: http://en.community.dell.com/dell-blogs/dellshares/default.aspx