Dell accounting “misconduct” - BAD
3-30-07: The latest news out of Dell is there are accounting issues. With this news, we are extremely concern about the company’s future. We once believed Dell was a value stock and worthy of consideration. Given the new circumstances, we are looking to sell this stock. This so call “misconduct” is probably worse than what is being reported. We have seen these type of issues before with other companies, it always end up badly. Here is what will likely happen:
In the short term, Dell’s stock will take a hit on this news. A drop of 5% is not out of the question. Short sellers are probably salivating at this point. The SEC will get involve and further investigate the company’s books. The stock will drop further on that news.
After the SEC investigation, Dell will need to restate its earnings. Depending on the severity of the “misconduct”, the stock will take more hit. We believed by the time this is all over; Dell stock will bottom out in the low-mid teens. The low valuation will then start to attract the attention of buyout firms.
Additional management shakeup will then occur; someone in the executive rank will be held responsible (scapegoat) and force to leave the company. The stock will then start to move up as Wall St. will view the shakeup as a positive move. Dell will then need to layoff more employees to please Wall St. and provide the impression of having control of the company’s cost structure. The stock might move up on the news of layoff.
While this is all happening, competitors are stealing their customers. In the end, the company will likely be acquired by a private equity firm(s) or by one of its competitors. We see Hewlett Packard (HPQ) possibility buying Dell or perhaps one of the Chinese computer companies.
We actually like Dell as a company and hope our predictions are wrong, but from an investment point of view, it is time to sell this stock and move on. The risk/reward does not appear to be on our side.
