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Here are Dell's quarterly sales, operating earnings and earnings-per-share for the last nine years:

Quarter.....Sales....Oper. Income.....EPS
1-97.........$2,588.........$198...........$0.0675
2-97.........$2,814.........$296...........$0.0725
3-97.........$3,188.........$346...........$0.085
4-97.........$3,737.........$397...........$0.10
1-98.........$3,920.........$429...........$0.11
2-98.........$4,331.........$483...........$0.12
3-98.........$4,818.........$539...........$0.14
4-98.........$5,173.........$595...........$0.15
1-99.........$5,537.........$600...........$0.16
2-99.........$6,142.........$694...........$0.19
3-99.........$6,784.........$650...........$0.18
4-99.........$6,801.........$513...........$0.16
1-00.........$7,280.........$625...........$0.19
2-00.........$7,670.........$736...........$0.22
3-00.........$8,264.........$818...........$0.25
4-00.........$8,674.........$589...........$0.18
1-01.........$8,028.........$588...........$0.17
2-01.........$7,611.........$545...........$0.16
3-01.........$7,468.........$544...........$0.16
4-01.........$8,061.........$594...........$0.17
1-02.........$8,066.........$590...........$0.17
2-02.........$8,459.........$677...........$0.19
3-02.........$9,144.........$758...........$0.21
4-02.........$9,735.........$809...........$0.23
1-03.........$9,532.........$811...........$0.23
2-03.........$9,778.........$840...........$0.24
3-03.........$10,622.......$912...........$0.26
4-03.........$11,512.......$981...........$0.29
1-04.........$11,540.......$966...........$0.28
2-04.........$11,706.......$1,006........$0.31
3-04.........$12,502.......$1,089........$0.33
4-04.........$13,457.......$1,187........$0.37
1-05.........$13,386.......$1,174........$0.37
2-05.........$13,428.......$1,173........$0.38
3-05.........$13,911.......$944...........$0.39
4-05.........$15,183.......$1,246........$0.43
1-06.........$14,216.......$949...........$0.33

The numbers are in millions except for EPS. Also, since Dell ends its fiscal year at the end of January, this past quarter is technically the first quarter of FY2007. I changed it because it just seems...weird. Don't ask me why they do it that way, I just own the shares.

Now let's deconstruct this stock. To the spreadsheets!

Let's start with operating profit margins:

Yup, this here's the squeaky wheel. The tech blowout obviously took a big toll on margins (11% is crazy good for a commodity maker). From 2001-2004, Dell was steadily recovering. It was the last three quarters that have been totally off-the-mark.

Now let's look at sales growth. Here's the trailing four-quarter sales:

I used a logarithmic scale so the "arcing" pattern is due to the slowing rate of sales growth.

Now let's look at the sales growth rate:

Wow! You can really see how much Dell's topline growth rate has "decelerated" (i.e., lower rate of growth) since the glory days. Sales grew just 6.2% last quarter. Nominal economic growth was 6.7%.

If you're new to investing, here's an important point. Sales growth and profit margins are closely related. When Dell's sales growth plunged in 2001--even turning negative for a bit--operating margins got squeezed. Imagine if you ran a business and suddenly everyone stopped buying your product. You'd cut prices which would lower your operating magin.

Notice how, from 2001 to 2004, Dell's operating margins gradually increased even though its rate of sales growth was slowing down. Assuming you keep your variable costs under control, all a company needs to do to grow its margins is grow its sales faster than its fixed costs. Simple, right? But a commodity business is all about the margins, and Dell's margins were too fat for its competitors to ignore.

Here's a scatterplot of Dell's quarterly sales growth (horizontal) and operating profit growth (vertical):

I didn't include a trendline, but the slope is clearly greater than 1.0 (meaning the trend rises at greater than a 45° angle). Around 20% is the magic point. Above that, each 1% increase in sales brings in more than a 1% increase in profit.

Here's Dell's trailing four-quarter EPS:

That last little down mark is what all the fuss is about. Wall Street thinks it will continue. The Street now projects earnings for this year of $1.44 per share, and $1.70 per share for next.

Posted by edelfenbein at May 19, 2006 8:20 AM