I’m on a little tour of the big cap well known technology companies. My first looklast week for Seeking Alpha was at Microsoft (MSFT) which has a ridiculous balance sheet and very inexpensive stream of annual cash flow: I thought I’d next have a look at Dell (DELL).
Much like Microsoft, Dell likely doesn’t have a whole bunch of happy shareholders. Dell’s share price has not gone anywhere since 1998 and is basically at half the level now that it was for most of the period 2001 to 2008.
But I don’t care about that. What does the balance sheet look like and what kind of normalized cash flow and growth rate does the company have?
Balance Sheet
And again, much like Microsoft, Dell has a balance sheet unencumbered by debt and loaded with cash. Almost $15 billion of cash actually which is pretty wild when you consider that the current market capitalization of the company is only about $28 billion.
Cash Flow / Growth Rate
And of course here lies the problem for Dell in the stock market. There is no growth. And there hasn’t been for years. In four of the last five years cash flow from operations has been $3.9 billion. And as you can likely imagine five years of flat cash flow, revenue and earnings growth mean that the stock market is going to give you one very miserly multiple.
Valuation
Just how cheaply is the stock market valuing Dell ? Here are the numbers:
- Market Capitalization - $27.8 billion
- Less cash - $15.0 billion
- Add debt - $5.0 billion
- Equals an Enterprise value of - $17.8 billion
The annual free cash flow stream for Dell net of capital spending is roughly $3.6 billion. Now look at the free cash flow yield on Dell’s enterprise value: $3.6 billion / $17.8 billion = 20.1%.
This business is certainly being priced as though it is a state of decline. But the numbers suggest that the decline in the PC business is being at the very least offset by improvements elsewhere as cash flow is holding up.
Where Are the Share Repurchases?
I guess what I would like to know before becoming a shareholder is why are they sitting with $15 billion of cash ? What are the plans for it ? For the last 10 years that cash hoard has earned basically nothing in terms of interest, and over the next 10 years the value of that cash hoard could be vastly diminished if inflation heats up.
Are they going to throw the money into an acquisition because they feel they have to do something? They have basically stopped buying back shares and don’t pay a dividend so all of that cash isn’t doing much for shareholders today.
I think I’d prefer to see share buybacks at least with the annual free cash flow coming in the door. With free cash flow of over $3 billion per year Dell could buy back almost 20% of the company in a year without even denting the cash on the balance sheet. Are they really going to find an acquisition that provides a better return to investors than the 20% free cash flow yield they can currently lock in buying back their own shares?
Two For Two of the Big Cap Tech Companies Look Cheap
So we have Dell trading at about a 20% free cash flow yield and Microsoft trading at roughly a 10% free cash flow yield. Both companies with incredible balance sheets.
There are obviously some concerns over Dell’s business going forward but that seems to be more than priced into the current share price. Microsoft has a much better business but even at a 10% free cash flow yield it may be even more attractive than Dell.
One thing I’d venture is that you aren’t likely to lose money buying these two companies at the current share prices. Buy cheap cash flow streams with incredible balance sheets behind them and good things are likely to happen.
Disclosure: I am long MSFT.
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