QUALIPORT
Spending Spree

By Maynard Paton (TMFMayn)
December 18, 2000

Carburton Street, London -- The Qualiport is about to indulge in a Christmas spending spree. But more on that later. Instead, let's kick off with Dell Computer Corporation (Nasdaq: DELL). I'm getting a little anxious over the computer giant's near-term growth prospects.

In Dell's third quarter results announcement, the group suggested that the twelve months ending January 2002 would see around 20% growth over its current fiscal year. However, a little number crunching on my part suggests that this forecast, while very much achievable, does appear to overstate the company's true underlying growth rate.

(To get up to speed with the latest goings-on at Dell, you may wish to read this Qualiport feature first).

Earnings

Taken from the Motley Fool's latest research report on Dell, the company's management during the third quarter conference call suggested that earnings per share (EPS) for the year ending January 2001 was expected to be $0.92 cents, implying fourth quarter EPS of $0.26.

Now, consider next year's earnings forecasts for Dell. Analysts are pencilling in EPS of anywhere between $1.02 and $1.15 for the twelve months ending January 2002. So, let's take an average of $1.085, implying earnings growth of 18% over the $0.92 expected in the current fiscal year.

That's all well and good. But the 18% growth figure is distorted by the company's weak first and second quarters reported earlier this year, when Dell's customers held back after their pre-Y2K spending binge.

So instead, compare the EPS expectations of the current fourth quarter to the fiscal 2002 forecasts. Dell would only have to replicate this year's anticipated Q4 $0.26 EPS performance throughout fiscal 2002 to generate $1.04 EPS and beat the lowest analyst's estimate. Alternatively, imagine Dell recording quarterly EPS figures of $0.26, $0.27, $0.28 and $0.28 next year, a performance that would generate full year EPS of $1.09 to roughly equal the average forecast.

Both of those scenarios would appear very much achievable, with little or no earnings growth required from Dell over and above the anticipated Q4 earnings of this year. But that's the rub. If the average forecast for 2002 proves to be accurate, then growth is slowing. I mean, if Dell manages to meet the average full-year forecast for fiscal 2002 and thus produces, say, Q4 EPS of $0.28 in that year, set against the expected Q4 EPS of $0.26 in fiscal 2001, then the forecast equates to quarter-on-quarter EPS growth of just 7.7%. That figure is well below the aforementioned 18% year-on-year EPS growth.

Sales

Let's turn to sales. Assume Dell meets its 27% revenue growth target for the current fiscal year, thus generating sales of $8,873m in Q4 to make £32,086m for the year in full. Now assume Dell meets its 20% sales growth target for fiscal 2002 and generates sales of $38,504.

Split that $38,504 into four quarters growing sequentially at the same rate, and we have rough quarterly sales performances of $9,165m, $9,466m, $9,778m and $10,100m for Dell in fiscal 2002. And although the first and second quarter of fiscal 2002 ought to see Dell report 25%-ish sales growth over the weak post-Y2K performances of this year, the third and fourth quarters could witness growth of just 18% and 14% respectively. Or in other words, the overall 20% sales growth target for next year appears to be aided significantly by the earlier Millennium lull.

At $19.875, Dell shares stand on a prospective price to earnings (P/E) multiple of 21.6 for this year, falling to 18.3 for the year ending January 2002. Although the rating looks fair for a company with prospective growth of 20%, I have my doubts that the 20% figure is truly indicative of Dell's underlying expansion. I feel the figure is buoyed by the weak Y2K performance recorded by Dell earlier in the year. Essentially, after my quick back-of-the-envelope calculations, I have a hunch that Dell's growth could slip to around 8-12% by this time next year.

Spending Spree

After a little deliberation, I'm announcing two Qualiport top-ups.

First up, PizzaExpress (LSE: PIZ). After speaking to the company's Chairman, David Page, I've become increasingly confident over the future prospects of the restaurant operator. Rather than repeat my thoughts in this column, I refer Qualiport readers to the summary rounding off the interview.

And secondly, MMT Computing (LSE: MMT). The group has recently terminated negotiations with a mystery suitor, the announcement causing MMT shares to plunge well below their "pre-talks" price. At a share price of 540p, simply annualising the company's latest second-half performance puts MMT on a forward P/E of 12.3 with a prospective yield of 4%. The lowly valuation for the IT consultancy is the stock market's punishment for the inevitably poor results covering the Y2K slowdown.

Although the IT industry's recovery from the Millennium deceleration is taking longer than most observers originally anticipated, I'm quite sure the revival will come in due course. Indeed, the well respected IT analyst Richard Holway has suggested that the UK software and computer services industry market will be "growing in excess of 16%" annually by 2003.

Holway also adds that "e-services" could triple in three years' time to represent 30% of the IT industry's total revenues. Good news for MMT, who now have a fair proportion of their workforce equipped to deal with the e-commerce system requirements of the company's blue-chip clientele. Another big plus for MMT is its Energy software division. After recording 60% growth in the latest financial year, the operation now contributes 25% of the group's profit and strong growth potential still remains. All in all, the company's record, rating and prospects appear very attractive at the moment.

So, sometime in the next five trading days and in accordance with the Fool's Trading Rules, the Qualiport will purchase £3,000-worth of PizzaExpress and £2,500-worth of MMT Computing.

Your say

Let's have a show of hands.

With PizzaExpress shares standing at 641.5p and MMT shares at 540p, what's your opinion?

• Both PizzaExpress and MMT look to be great investments
• Only PizzaExpress looks to be a great investment
• Only MMT looks to be a great investment
• Neither PizzaExpress nor MMT look to be great investments
• I don't know/care

Click here to register your vote.

Where Next?

What is The Motley Fool Stock Research?
The Motley Fool Stock Research -- Dell's third quarter
Read an Interview with David Page, Chairman of PizzaExpress
All about MMT -- MMT Under the Microscope