The Razor’s Edge

2-Year Price History

Ockham’s Rating

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DELL Revenue

As a value investing shop, we are interested in seeing how DELL’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 1.51x and the low end of the range at 0.88x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for DELL of 0.28x is well below its normal historic Price to Sales levels. At a price of $9.46, DELL is 77% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

DELL Cash Earnings

As the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company’s value, and currently DELL is significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for DELL, the current level of Cash Earnings compared to its historical levels helps identify where DELL is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 23.78 and a historical low Cash Earnings per share ratio of 13.93, an investor can relate where value becomes optimal.

So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for DELL? From the Ockham perspective, we are looking specifically at DELL to see if the market is recognizing the huge disparity between DELL’s past stock price to Cash Earnings ratio to today’s levels. At a difference of 78% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at DELL. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.

DELL Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company’s inherent expectations. DELL is not paying a dividend at this time, nor do they have a history of paying a dividend for the last 10 years plus. Therefore, we are not utilizing the dividends portion in our study. If DELL initiates paying a dividend, we will begin to factor this into the Ockham approach.