Don't bank too soon on Dell in the current market conditions

Dell Inc's quarterly earnings report beat investor expectations that have been repeatedly hammered down. But the computer maker's celebrations could be short-lived.

Results for the second-quarter ending in July were buoyed by transient business factors as it continued to lose share in its core PC business.

Meanwhile, technology budgets are still being slashed and the company's business, which depends heavily on personal computers, is unlikely to be an early beneficiary of any corporate spending rebound that could begin in 2010.

Government computer spending saved the quarter for Dell as public spending surpassed sales to its mainstay large commercial customers for the first time.

However, this was largely due to seasonal education demand from state and local governments. Sales to corporate customers and small and medium-sized businesses remained weak, falling 32 per cent and 29 per cent respectively.

It is a measure of Dell's battered condition that a fall in government sales of just 16 per cent and consumer sales of 9 per cent were seen as positive factors.

The Texas company was alone among the top five PC makers to lose market share in the second quarter compared to the same period a year earlier, market research firm Gartner says.

For the current third-quarter, government spending will have to offset expected weaker corporate spending, especially in the United States and Europe. Hopes for Dell's stock rest on the potential for the next generation of Microsoft operating system software - Windows 7, due out in October - to spur on a wave of computer upgrades next year. The average corporate PC is now 4.5 years old.

As PCs represent a far larger chunk of Dell's sales than for other computer manufacturers, it stands to be the biggest beneficiary of any spurt in new sales.

But there are doubts whether Windows software has the same pulling power that it did a decade ago in terms of sparking hardware upgrade cycles as corporate buyers control spending more tightly these days.

Another problem is that corporations and governments will need to put additional computer servers, storage and software in place before any major PC upgrade cycle gets under way.

CEO Michael Dell is convinced that "a big refresh cycle" is under way over the course of the next year. The question is when: It could be 2011 before any broad PC upgrade begins to flow through into company results.

Despite all these questions, Dell's shares are up more than ten per cent after the report.

The stock trades at a 15.5 multiple to Wall Street's 2010 earnings forecasts, in line with the computer hardware sector, but roughly 40 per cent higher than multiples of healthier, more diversified rivals Hewlett-Packard and IBM.

A big comeback in the company's fortunes looks priced into the stock.