Why We Still Like Dell After Its Disappointing Results

Dell (DELL) reported disappointing fiscal fourth-quarter results Tuesday after the close. Though we will be revisiting our above-market fair value estimate for the personal-computer maker, we don't expect to make a material change to it. (We make available our full report on Dell and hundreds of other companies here.) The image below shows our conservative valuation assumptions in arriving at Dell's fair value.

Source: Valuentum Securities, Inc.

Revenue in Dell's quarter advanced only 2%, to $16 billion, as a 6% jump in services revenue offset roughly flat product revenue. The firm continues to expand its mix of revenue and earnings, and services revenue growth outpaced products revenue advancement in the quarter, which we view positively.

Non-GAAP operating income fell 11% in the period, while non-GAAP net income dropped 10% as the company faced higher disk drive costs due to the well-known supply constraints from the recent flooding in Thailand. Share buybacks, however, mitigated the decline in earnings per share, which fell 4% from the same period a year ago, to $0.51 (consensus was at $0.52 per share).

Looking ahead, Dell said it is focused on operating income and cash flow, important targets, though we prefer a focus on return on new invested capital (which may prevent a reckless acquisition). For 2013, the company expects non-GAAP earnings per share to exceed the record $2.13 per share it achieved during fiscal 2012 and excellent net income conversion to cash flow. Though we like its full-year outlook, the company guided revenue in its fiscal first quarter to decline 7% on a sequential basis, lower than what consensus was expecting.

However, we think the launch of Windows 8, which will be offered on Dell's products, will serve as a nice catalyst for the company's shares to converge to our fair value estimate, despite intense competition from the tablet market, namely Apple's (AAPL) iPad portfolio. We are considering Dell for inclusion into the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.