The Zacks Analyst Blog Highlights: Dell, Hewlett-Packard Company, International Games Technology, Bally Technologies and WMS Industries

Nov 14, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Nov. 14, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Dell Inc. (Nasdaq: DELL), Hewlett-Packard Company (NYSE: HPQ), International Games Technology (NYSE: IGT), Bally Technologies Inc. (NYSE: BYI)  and WMS Industries Inc. (NYSE: WMS).

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Here are highlights from Friday's Analyst Blog:

Earnings Preview: Dell, Inc.

Dell Inc. (Nasdaq: DELL) is scheduled to announce its third quarter 2012 results on November 15, 2011 and the modest revision in analysts' estimates reflect changes in the company's future business prospects.

Second Quarter Overview

The company reported decent second quarter 2012 results, with EPS of 54 cents beating the Zacks Consensus Estimate.

Revenues in the second quarter were $15.7 billion, up 1.0% from $15.5 billion reported in the year-ago quarter. The company has currently shifted its focus to high-margin Enterprise Solutions and Services business. Moreover, the company has also realigned its strategy to focus on three solution domains including next generation computing solutions and intelligent data management, services, security and cloud and end-user computing.

Large Enterprise and SMB (Small & Medium Businesses) revenue improved 1.0% and 5.0%, respectively, compared with the year-ago quarter. Large Enterprise benefited from a 1.0% year-over-year spike, with server revenue climbing 5.0% and 11.0%, respectively. Consumer Business revenue inched up 1.0% to $2.9 billion, driven by strong growth in EMEA and APJ, partly offset by lower revenues from the Americas.

Gross margin in the reported quarter increased to 23.3% from the year-ago level of 17.4% driven by continued strong product cost execution, disciplined pricing and the ongoing shift to higher value Dell technologies products. During the quarter, the company continued to eliminate lower-margin businesses, thus diverting from the company's long-term growth target.

Dell raised its non-GAAP operating income growth expectation for 2012 to 17.0%-23.0% from the earlier guidance of 12.0%-18.0%. Based on strategic decisions to redirect resources from lower-to-higher value solutions and a more uncertain demand environment, the company also lowered its full-year revenue outlook to 1%-5% from the previous range of 5.0%-9.0%.

Agreement of Analysts

Out of the 33 analysts providing estimates for the third quarter of 2012, six analysts made downward revisions in the last 30 days, while none of them made any upward revision. Out of the 23 analysts providing estimates for fiscal 2012, only one analyst made an upward revision in estimates over the last 30 days while five moved in the opposite direction. However, for fiscal 2013, seven analysts made downward revisions, while none moved in the opposite direction.

Some analysts believe that Dell was in confusion for most of the quarter. This apart, the analysts' interpretation of the IDC data also suggested that Dell did not benefit as much as expected due to some weakness in demand. In fact, IDC estimated that Dell's worldwide PC units declined approximately 2% in 3Q.

The analysts also expect Dell to be selective in pursuing low-margin business, favoring profitability and cash flow over growth. It will be interesting to see how long management holds on to its 5.0% PC margin growth target in the back drop of eroding market share.

Some analysts expect the recent catastrophe in Thailand that will impact the hard disk drive (HDD) supply situation to have a minimal impact on units and revenue, although it is likely to affect Dell's gross margin if the latter chooses not to raise prices or if it fails to offset its bill of materials. Prices charged to tier-one OEMs are also expected to increase by 10.0% or more, which could lower the gross margin by 50-75 bps and non-GAAP EPS by approximately 4 cents per quarter.

Magnitude of Estimate Revisions

Since the second quarter earnings release, the magnitude of revisions has been modest. Overall, estimates for the upcoming quarter moved down to 26 cents from 28 cents in the last 90 days while the same declined by a penny over the past 30 days.

Estimates for fiscal 2012 have moved down from $1.01 to 99 cents over the last 90 days and have decreased by a penny in the last 30 days. For 2013, estimates have gone down from $1.18 to $1.12 over the last 90 days.

Recommendation

Dell reported decent second quarter results, with earnings per share (EPS) and revenues increasing from the year-ago quarter. New products, stronger public segment revenue, opportunities in the Electronic Medical Record sector and entry into the smartphone domain are positives for the company.

On the other hand, the company lowered its revenue forecast for the upcoming fiscal year ending January. The uncertain demand environment induced the company to lower its previous outlook. This apart, the recent floods in Thailand may also affect Dell's margin as it may affect the supply side of the business. Moreover, stiff competition from Hewlett-Packard Company (NYSE: HPQ) and Acer concern us.

The stock has a Zacks #3 Rank, implying a short-term Hold rating.

IGT Enhances Casino Entertainment

International Games Technology (NYSE: IGT) inked a letter of intent (LOI) with Revel Entertainment Group, LLC to provide its casino systems solution to the latter. IGT will install IGT Advantage and sbX casino management systems and Service Window applications, which will enhance the casino experience for the customers making a splurge in Revel casinos.

According to the LOI signed between the two parties, IGT will be providing gaming machines for almost 40% of the casino floor including IGT's popular MegaJackpots. Additionally, IGT will be providing the casino management system that includes IGT Floor Manager, Media Manager and Service Window, with applications including Intelligent Bonusing and Taxable Accrual, as well as IGT Mariposa business intelligence solutions.

These products are expected to improve the efficiency of the casino floor, helping to attract and retain customers and at the same time, lowering operating costs. Thus, eventually, it will enable the company to improve on the bottom-line.

The gaming solution sbX has multiple tools, which spices up the entire gaming experience. sbX Service Window provides unique player-interaction experience at the slot machine. The window provides options regarding information and services that the players and operators can optimize. sbX Floor Manager allows access to the IGT game library, enabling operators to efficiently mange their casino floor with the mere touch of a button.

IGT's sbX is the first server-based gaming solution that allows its operators to run games of their own choice at any time they wish and facilitates better casino floor management.

Recommendation

The casino sector continues to face macro-economic concerns due to high unemployment levels. This has led many casino operators to reduce their costs in an attempt to preserve their liquidity, subsequently resulting in a slower machine replacement cycle. This trend appears to be hurting IGT's growth outlook.

While sluggish replacement sales will remain a primary headwind for IGT in the near term, we expect sbX to continue to enjoy high demand in both the domestic and overseas market due to its cost effectiveness.

We believe that international expansion, an impressive product portfolio, cost-cutting initiatives, reducing dependence on the domestic machine replacement cycle, new contract wins, solid free cash flow and strong growth from the interactive business will drive growth over the long term.

However, sluggish macro-economic conditions, fewer new openings and increasing competition from Bally Technologies Inc. (NYSE: BYI) and WMS Industries Inc. (NYSE: WMS) will keep the stock range bound in the near term.

We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has been allotted a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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