FBR analyst Clay Sumner thinks that Dell (DELL) is poised to surprise on the upside because investors and analysts are underestimating the margin benefit of lower component costs. Sumner specifically references lower LCD panel costs, which he thinks are an excellent proxy for component costs in general:
We believe that the costs of LCD panels and other components have been much more favourable for Dell than was expected heading into the quarter and that this may lead to 2Q gross margin upside… In FY 1Q08, average LCD panel costs fell sharply, about 4.5% per month, and Dell’s gross margin grew 215 bps in a single quarter. In FY 2Q09, average LCD panel costs fell over 8% per month.
Sumner also insists that the effect of lower component costs won’t be wiped out by lower ASPs, as many in the industry believe:
While investors are aware of the favourable component cost environment, many investors seem to feel that any component cost benefit is likely to be neutralized by falling ASPs. However, we believe the historical evidence suggests that the degree of Dell’s 2Q component cost reductions would tend to outweigh the impact of falling ASPs on gross margins.
The bottom line is that Sumner thinks Dell could beat the Street’s expectations, which call for a 10 basis point decline in gross margin given the fact that LCD prices have been falling 8% per month during the July quarter. Sumner rates DELL Outperform and reiterates a $30 target.
Business Insider Emails & Alerts
Site highlights each day to your inbox.