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CASE 2: DELL vs.

HEWLETT-PACKARD
Based on our review of key financial ratios in profitability, asset management, liquidity, and solvency of Dell when compared to Hewlett-Packard (HP) as a benchmark competitor for the last seven years (see attached), and using Standard & Poors latest industry survey of the computer hardware industry, we evaluate Dell management as outstanding in the last seven years. Profitability: Both Dell and HP reported increasing sales revenues for the last seven years with the exception of 2009, which can largely be explained by the economic recession. In 2009, Dells sales revenue fell off slightly by only $32 million; whereas as HP sales revenues fell by $18 billion. This may be an indicator that Dells model may be more robust than HP because Dell seems to be weathering the economic storm better than HP. HPs total revenues were salvaged by a $13.8 billion increase in service revenues. In addition, Dells return on equity (ROE) substantially outperformed HPs ROE in the last seven years. This means that for every $1 invested, Dell has returned between 42 and 87 cents per year; whereas, HP has only returned 7 to 21 cents per year for every $1 invested in the last seven years. Dell has maintained a steady gross profit margin (GPM), ranging from a low of 16.6% in 2007 to a high of 19.0% in 2008. HP would appear to have a much higher percentage GPM, which ranges from a low of 39.2% in 2007 to a high of 50.7% in 2009, but this is due to its service revenues that are not part of cost of goods sold (COGS) and that inflate GPM. Liquidity: Dells cash and marketable securities to assets has ranged from 30% to 40% in the last seven years; whereas, HP has ranged from 9% to 20%. This is one indicator that Dell has higher liquidity than HP, especially because Dells model is based on the just-in-time inventory method. The other liquidity indicators, including the current ratio, accounts payable turnover, and days payable period seem to be substantially comparable to HP in the last seven years, although HPs days payable period shot up to 95.7 days in 2009; whereas, Dells days payable period decreased to 60.5 days in 2009. Asset Management: As may be suspected, Dells asset management ratios have significantly outperformed HP throughout the last seven years in, most notably, Dells inventory turnover, inventory on-hand period, and asset turnover ratios. For example, Dells yearly average inventory turnover in the last seven years was 76.9, compared to HPs 7.8. Additionally, Dells assets turned over more than twice as fast as HP in the last seven years. Dell held inventory on-hand for an average of 5.16 days; whereas, HP held inventory on-hand for an average of 47.2 days throughout the last seven years. Solvency: Long-term debt to total assets and long-term debt to shareholders equity jumped significantly for both Dell and HP in 2009 compared to relatively low ratios in the years 2003 to 2008 respectively. Conclusion: Though Dells performance in the last seven years has been outstanding, most of the top-10 PC vendors managed to increase their market share in 2009 despite eroding profit margins in the industry. According to the S&P industry survey, this increased pressure on price created the mini-notebook phenomenon, which has caused consumers to buy competitively-priced brand names. Both Acer and HP outpaced Dell in mini-notebook sales in 2009, even though Dell is the only direct-sales, low-cost manufacturer of the three.1 As Dell loses its low-cost edge against competitors, it must continue to expand into service and software industries and become an IT conglomerate to sustain long-term profitability. 2

1 2

Smith, Thomas W. (April 22, 2010) Industry Surveys: Computer Hardware. Standard & Poors, 4. Id, at 6.

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