When I was a rookie broker at Merrill Lynch, I remember going through a training class about equity analysis. Even though Merrill had its own team of high-quality analysts, the Financial Consultants at ML still were required to hold a conversation about balance sheets, PE ratios and ROE. It was a great experience and one I still use today when looking at stocks.
Not to get into the details about the class, but one item you definitely remember is company earnings work in cycles. Picture a wheel and start at 6:00, and earnings expectations are generally low. The next quarter the expectations go up, and the company beats, and the stock rises. You do this all the way to 12:00, but that's when expectations generally exceed earnings. Now, all of this is meaningless if companies continue to beat, or scandal erupts, or the products or services offered become obsolete--but, in the event of looking at this from a top-down approach, this analysis makes the most sense (plus, you don't have to go blind reading an income statement).
Now, where does Dell fit into the wheel--well, right at 6:00. The company released earnings after the bell yesterday and the report was better-than-expected. Dell said they were able to cut costs, while protecting prices. But, expectations weren't that great, and the challenge will be next quarter. But, Dell is confident and is optimistic about reaching those goals. All of this is great news for the company's stock and it's clearly helping futures this morning as the markets are expected to open higher.
One last thing about Dell is the company's higher-margin software and peripherals. This area continues to grow and really adds value to the company's revenue mix. If this area continues to expand, look for Dell to continue its bullish path.
Todd M. Schoenberger, Managing Director
LandColt Trading, Inc.