Dell (NYSE:DELL) has been on a nicely upward tear of late, buoyed by improving analyst sentiment and some exciting new use cases. The computer manufacturer recently turned in another 6.7% in trading, featuring gains that have held into the trading day so far as of this writing. That's good news for the company, and even better for investors, so let's take a look at what's holding the company aloft.
The Big VMware Spinoff
The latest reports featured an exciting conclusion that's been almost a year in the making. Last June, word first emerged that Dell was considering spinning off VMware (NYSE:VMW) directly to shareholders. Dell formerly owned 80.6% of the company itself, and now, it's opening up the floodgates to let shareholders buy in instead. The deal is expected to conclude in the fourth quarter of this year, reports note, though a slate of conditions will need to be satisfied first, among them confirmation from the IRS that the transaction won't come with any taxes assessed.
Reports suggest that VMware at close would offer up a special cash dividend, somewhere between $11.5 billion and $12 billion, though Dell itself would walk away with between $9.3 billion and $9.7 billion of that. Dell in turn would use that big new slug of cash to pay down debt, and with the resulting improvement on its balance sheet, would actually put it on track for an “investment-grade credit rating.” That would make its corporate debt particularly prized as an investment opportunity, and improve its ability to raise cash down the line.
The move would also require VMware to take on a little extra debt itself to complete the transaction—a good slug of it, reportedly, would be covered by cash on hand—but VMware's balance sheet can more than stand a little more debt on it, at last report. In the end, both Dell and VMware would end up with “investment-grade” credit report, and that opens up significant opportunities for both.
This news comes on the heels that Dell was already in line for some gains thanks to improved corporate spending on technology. Deutsche Bank analyst Sidney Ho came out with a report suggesting that corporate IT spending was likely to trend upward this year as offices reopen, even with work-from-home remaining a fairly large part of the picture. Thus, with the VMware spin-off to fire up the short-term, and potentially improved IT spending to put some fire under the long-term, there's good news afoot at Dell.
Analysts Maintaining the Bullish Picture
The broader analyst pool, as revealed by our latest research, has been bullish on Dell for quite some time. In fact, the company has maintained a consensus “buy” rating for the last two years, with some shifting in the ratios over time.
A year ago, the company had 10 “buy” ratings and four “hold” ratings to its credit. Six months ago, a big spike of caution emerged as the 10 “buy” ratings remained, but “hold” went to eight. A month ago, that caution started to dissolve as the ratings shifted to 11 “buy” and seven “hold”. Today, it's shifted once more as we stand at 12 “buy” ratings and five “hold.”
Price targets, meanwhile, run a shockingly broad range. The current average is $91 per share, with a high sitting at $120 and a low down around $50. Yet this point is ameliorated significantly by the fact that six analysts have raised their price targets on Dell in the last 24 hours alone.
Short Term Winner, Long Term Possibility
Dell is definitely on track to be a winner in the short term. The spin-off of VMware will significantly boost Dell's fortunes, and only slightly negatively impact VMware's as well. It's certainly a good move to pay down debt; that frees up more cash in the long run since less of it has to go to debt servicing. Plus, should Dell need to go back to the well to seek further debt, having an investment-grade balance sheet should make finding new creditors a breeze.
The question, though, is the long-term proposition. Certainly, that investment-grade balance sheet will be helpful for Dell going forward. Yet the notion that there's going to suddenly be an uptick in corporate IT spending this year looks a bit dicey. However, that may not be necessary; even if work-from-home prevails into 2022—and there's not a lot to suggest it won't, especially based on how the labor market looks right now—the consumer-grade hardware spend should remain sufficiently elevated to keep customers involved. Plus, there's the issue of corporate IT spending focused on servers and cloud-based systems; there has to be a central login point, after all, and that has to be maintained.
Regardless, Dell's recent gains are easily traceable, and look like they can be sustained at least into the short-term. It's time to get a Dell, or at least a few shares of it.
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