Slashed earnings forecast sends Dell stock plunging

NEW YORK — Shares of Dell plunged to their lowest level in nearly five years Friday after the world's largest computer maker slashed its second-quarter earnings outlook below Wall Street's estimates, blaming its aggressive price-cutting and a slowing global market.

The sell-off wiped out nearly $5 billion of Dell's market value in a single day. And even though analysts believe the shortfall is largely a company-specific problem, the news sent shivers through the entire technology sector, with shares of companies that supply parts to computer makers and even Dell's main rival Hewlett-Packard taking hits.

Analysts had been expecting the company to lower its sales outlook, but the resulting profit shortfall surprised investors, who sent the company's shares down $2.19, or nearly 10 percent, to close at $19.91 Friday. The last time the stock traded near that price was in 2001.

The company said early Friday it expects fiscal second-quarter earnings between 21 cents and 23 cents per share on sales of about $14 billion, below the earnings of 32 cents per share on sales of $14.2 billion analysts polled by Thomson Financial had expected. The company's previous outlook was roughly in line with those consensus estimates.

The news highlighted ongoing, company-specific challenges that back the notion that the "Dell era" is over, wrote UBS analyst Benjamin Reitzes in a note to clients, keeping a "hold" rating on the company's stock.

Dell's operating margins were already low, so even a seemingly minor revenue shortfall can compress them quite a bit, leading to much lower earnings than a company with strong margins would see, said ThinkEquity analyst Eric Ross.

"Internally, the company is in disarray. They are finding it difficult to compete because they are so used to winning," he said. "It's taking them more effort to be the low-cost, low-price provider."

Reitzes pegged the quarter's gross margins in the 15 percent to 16 percent range, compared with 17.4 percent last quarter and 18.6 percent in the year-ago period.

This, he said, is lower than anyone expected.

Round Rock, Texas-based Dell pioneered the model of selling directly to consumers over the phone and Internet, bypassing retailers. But the company is facing tough competition from rivals such as Hewlett-Packard and China's Lenovo Group.

During the company's annual shareholders meeting Friday, Chief Executive Kevin Rollins said the competitive environment is growing more intense, and Dell's biggest opportunities to continue growing are outside the U.S.

But the company did not go into specifics about its guidance despite the "very material" miss, and has decided not to hold a conference call to discuss the preliminary results, Reitzes wrote.

Dell's worldwide PC shipments grew about 11 percent in the second quarter, according to research firms IDC and Gartner. But others saw faster growth, and as a result Dell's global market share barely budged.

Dell's news weighed on Hewlett-Packard's stock as well as the tech sector in general. HP slid $1.28, or 4 percent, to close at $30.52 Friday.