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Stock to Watch: Dell set the bar really low - and missed it

Dell Inc. says the Chinese economy is growing at its slackest pace in more than three years. China is a key market for the computer maker.


Dell Inc.

Thursday's close: $9.56 (U.S.) a share, down 2 cents. (In post-market trading, shares are down a further 23 cents, or 2.4%)

52-week range: $9.11 and $18.36 a share.

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Annual Dividend: 32 cents a share for a yield of 3.3 per cent

Analysts' ratings: There are 17 buys, 18 holds and 4 sells, according to Bloomberg data. Price targets range from $9.00 to $18.50 a share.

Recent history: Dell's stock has been on a death spiral in recent years as sales of its core personal computer business has continued to tumble. Shares of the Texas-based company have taken a nearly 50-per-cent haircut from a 52-week high in February. A big problem is that Dell's PC business faces competition from the explosion in mobile devices like tablet computers as well as smartphones. Earlier this year, Dell slashed its earnings guidance for fiscal 2013, and tempered its outlook for its third quarter as distributors waited for the launch of the new Microsoft Windows 8 operating system. Dell woes are being exacerbated by a weakening global economy, with worldwide PC shipments falling more than 8 per cent in the third quarter from a year earlier, according to research firm Gartner Group. Growth has slowed despite Dell's attempt to diversify into offering consulting services to businesses and making acquisitions focused on the software and cloud-computing space.

Outlook: After the markets closed on Thursday, Dell reported an adjusted third-quarter profit of 39 cents a share versus consensus expectations of 40 cents. Revenue came in at $13.7-billion versus expectations of $13.9-billion. In after-hours trading, Dell shares were trending lower, down 2.4 per cent by 5 p.m. (ET).

"Profit wasn't off by a lot, but it was off," said Stephen Rogers, a portfolio manager with Horizons Investments Inc. He does not own shares of Dell, but those of competitors like Apple Inc.

"They [Dell] set the bar really low," Mr. Rogers said. "So they clearly struggled even just to get close to the bottom end of the extremely low expectations. To me, there is no sign that anything is getting better...If the sentiment and general interpretation is disappointment, then when the volume kicks in [on Friday], then we could see a more dramatic sell off."

Investors may have been tempted recently to buy Dell shares because they are cheap, trading less than 6-times forward earnings. "There is enough downward momentum in their business right now that you are better off on the sidelines until you see some tangible signs of improvement," he said. "To me, there is no sign of a turnaround...It's the old value trap. It can get cheaper."

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