Dell Inc (DELL) Has a Good Quarter on PC Demand

The leading maker of PCs in the United States, Dell Inc, put together one of their better quarters since the US economy began to sour but the stock remains expensive after a recent run-up. The stock of Dell has rallied over the past three months from $11.50 a share to over $16.00 as the outlook for technology companies worldwide has improved.

Second Quarter Earnings

This morning the company announced 2nd quarter earnings which beat expectations. On lower revenue they were able to post 28 cents a share of income well above expectations of 23 cents. Revenue is expected to decline 16% this year compare to last year and finally rebound 4.5% next year.

The company has reported stabilized demand from consumers and businesses for PCs but they feel business demand will not improve until 2010. Windows 7 is one of the catalysts that should increase PC demand among business owners as companies will want to take advantage of the upgraded operating system with better performing machines.

Long Term Trade

With a current price/earnings (P/E) ratio above 15, revenue decreasing, and earnings still falling, any investment in Dell needs to be long term. Next year earnings are expected to increase 18.6% compared to the current year which would allow for some slight appreciation in the stock price.

Markets rallied to close the week strong as Ben Bernanke made positive statements about the overall economy and home starts showed a very good improvement over past readings.

Ben Bernanke

Federal Reserve Chairman Ben Bernanke commented during a speech on Friday that the economy is near recovery. This news sent the indexes higher during a week that was a little volatile at the beginning but moved higher the final four days. The one area of contention is lending to consumers and business has not completely returned to normal. On Friday all the major averages advanced with the Dow Jones Industrial Average up 1.69% near the close of the day.

Home Sales

The National Association of Realtors reported that existing home sales rose 7.2% during July compared to a reading of 4.89% in June. This represented one of the best readings in 10 years. Government tax credits are partly responsible for the rapid sales in addition to pent up demand in housing. Similar to the Cash for Clunkers program, consumers waited to see how the economy was going to progress and then jumped in to secure government aid prior to tax credit programs ending.

Ultra S&P 500 Proshares (SSO)

On of my favorite ways to trade the macro economic trends is with the Ultra Proshares S&P500 exchange traded funds. There is the Ultra (SSO) which tracks double positive moves in the S&P 500 and there is the Ultra Short (SDS) which moves in the opposite direction to the SSO. Therefore depending on the current trend, holding a position in one or the other can provide nice returns with minimal volatility.

Video Rental Companies Suffer

Blockbuster (BBI) reported today that they had an operating loss during the second quarter and their shares fell 16% subsequently. The company lost $39.7 million as revenue fell 22% due to competition from Netflix (NFLX) and Redbox (CSTR). Blockbuster has tried to compete with Netflix by starting it’s own delivery service called Total Access. And some of the changes have been beneficial as the loss in revenue didn’t come from actual DVD rentals but from store closures and merchandise. The company is expected to loss 5 cents next quarter but profit for the year. The stock is currently very cheap and had risen from 60 cents a share to 85 cents a share before the drop today. Look for continued weakness as the company transitions from store fronts to less expensive delivery methods.

Netflix Delivering Profits

Netflix is positioned the best of the three DVD companies as their online program continues to grow. Revenue for the year is expanding 22% while profit is growing at a rate of 35%. The price to earnings ratio for the company is near 20 which represents a slight discount to earnings. The pullback today in sympathy with Blockbuster could present a buying opportunity but the over consumer is not healthy yet as the economy struggles to expand therefore consumer based names are a risk.

Redbox Getting Squeezed

Coinstar (CSTR) owner of Redbox came under fire today for a different reason, their inexpensive rentals are hurting the production companies which release movies to them. Therefore Warner Brothers is joining Universal and 20th Century Fox in delaying new movie releases to the kiosk operator. Coinstar fell 11% and could see analyst downgrades if the new release dates affect revenue in the future.

Cisco Systems (CSCO) No Longer a Growth Stock

Cisco used to be one of the great Internet/Technology growth stocks that was growing in the double digit range year after year. But that is no longer the case with revenue declining and earnings falling in the current quarter and projected to fall in the following quarters.

Cisco Reports

Cisco is set to report fourth quarter earnings after the bell today and could beat low expectations for the fifth time in a row. Analysts recently upgraded their expectations for the quarter from 28 cents a share to 29 cents a share. Yet this represents a drop of 28% from the same quarter last year.

Revenue

Revenue at Cisco is also declining compare to prior years with the current quarter falling 18% and the year looking to fall 9% overall. Cisco is considered a gauge of overall IT spending with it’s routers and switches fueling the growth of information sharing and the Internet itself. But these markets have matured while Cisco has tried to push into other areas with better growth.

Stock Rally and P/E

Cisco’s stock has rallied from a six month low of $13.62 a share to a recent high of $22.57. The stock could continue to move higher on expectations of a rebound in tech spending. But the numbers currently do not show growth and once the company’s price to earnings (P/E) ratio reaches an unsustainable level, the stock should return to levels closely inline with it’s growth rate.