Dell (DELL) reported a solid Q1 beat yesterday: revenue of $16.1 billion vs. consensus of $15.68 billion, and EPS of $0.38 vs consensus of $0.34. Friedman Billings Ramsey reiterated their Outperform, characterising Dell’s results as “solid progress on its turnaround efforts.” FBR focused on Dell’s margin expansion, noting how the company had trimmed opex from 12.9% to 12.4% year-over-year. FBR thinks Dell can build on this improvement:
Looking forward, we believe there is much more margin improvement to come, with three major cost-reduction initiatives well underway but not yet in play. First, we expect several dozen new notebook models to launch over the next three quarters, which have been redesigned from the ground up for cost competitiveness by market segment. By simply ordering from its suppliers’ “menus” (as HP and Acer do), instead of specifying custom industrial-grade components, Dell, we believe, will take hundreds of basis points of COGs out of its notebook products.
Friedman also sees Dell achieving big cost reductions by shipping more products directly from suppliers:
Second, we expect Dell to save significant logistics and facilities costs as it begins shipping more products directly from suppliers to customers. We expect savings to begin showing up here next quarter, though it may take a year or more to realise the full benefits from logistics facilities consolidation.
Finally, FBR is upbeat about potential COGS reductions as a result of the launch of Dell’s newest, higher-margin storage products (Dell/Equalogic):
Third, we believe Dell will increase its storage margins substantially over the coming year with its Dell/EqualLogic products, which, we believe, are off to a fast start, with much higher-than-average Dell margins. In short, we think significant, achievable, and sustainable COGs improvements are well underway, and we believe that consensus margin expectations and valuation remain too low.
Friedman reiterates its $30 price target. FY10 estimates move from $70.96 billion and $1.95 to $71.51 billion and $2.02.