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Dell's On Deck; Tough Times Ahead?

Dell
AP
Dell

I'm reading the analyst comments on Dell just like many of you, and I'm scratching my head: Broadpoint AmTech's Dinesh Moorjani has a "buy" on these shares, recently upgrading the stock because of an improvement in the personal computer environment. Shaw Wu at Kaufman wrote last month that better-than-expected laptop demand on the quarter bodes well for Dell . And Goldman Sachs' analyst David Bailey wrote last week that most of the investor concerns out there are already priced into Dell's shares. He wrote in a note that Dell's big exposure to big corporate clients, along with near-term gross margin pressure is "mostly reflected in the stock's underperformance."

But is it really? Shares were up 13 percent during the quarter, and up another 10 percent since the quarter ended. Seems like investors haven't priced "concern" into the shares; it seems like they're piling in, now that the concerns have largely subsided.

That optimism, however, might be a tad premature as we head into Thursday's earnings report. Is Dell at bottom and now's the time to get in? Did investors already miss the bottom? It seems to me there are some significant headwinds at this company and I don't see them dissipating any time soon. So my optimism, especially in light of the recent earnings report from rival Hewlett-Packard , is tempered at best.

To wit, those improving market conditions for laptop computers are largely as a result of the popularity of so-called netbooks, which will double unit sales industrywide this year over last. Indeed, that's good news, but they're so inexpensive, with such razor thin margins, that I'm not sure they bring much to the party for a company like Dell. The company has been operationally challenged for some time, enjoying some improvements recently on the cost-cutting side of the equation, but this is a company that's had difficulty translating topline success to the line that really matters.

Dell also has a broader exposure to enterprise clients and with IT spending still rather paltry, that could exacerbate Dell's problems and slow the company's recovery. Of course, there are various market researchers out there calling for an IT spending improvement, especially following Microsoft's Windows 7 release in a few weeks, but that recovery could still be several quarters away.

The business business for Dell has been under as much, if not more pressure than the consumer division, and that too faces additional headwinds whether you believe the recession is beginning to wane or not. Dell's current quarter includes back-to-school, and just about everyone thinks this is going to be an historically awful shopping season. Heck, even Target is offering a "layaway" program for school supplies. Sheesh!

Analysts expect Dell to report 23 cents a share in profits on $12.6 billion in revenue.

On the conference call, look for some more color on Dell's mobile phone entry into the Chinese market in a partnership with China Mobile. Timing might be good here since Apple is still fumbling about, trying to crack the Chinese market. Trouble for Dell is that Apple will in fact crack the Chinese market and once it does, Dell will face a very strong competitor. Still, why not offer something in the US? Is Dell planning to bring a smart phone to the United States? What about those rumors about Dell making a play for Palm? Is that still a possibility? Dell may be feeling its way through the darkness, working its way through the forest, and the light indeed might still be ahead. The trouble is, I don't think anyone has a good idea of just how far ahead that light might be, and that might be a little troubling for Dell's investors. Or it should be.

Dell's numbers Thursday need to justify the run these shares have enjoyed, otherwise it could be a particularly brutal of sellin' on the news.

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