JPMorgan Maitains Neutral On Dell After Earnings

We maintain our Neutral rating. Dell posted light revenues, but gross margins were much better than expected. Margins could provide a bounce in the stock in the near term, but we think that one quarter does not make a trend. We need to see sustainable margin strength before becoming more constructive, and given the macro storm and Dell's low recurring revenue base, such a ramp could prove difficult. October results exhibit tactical shift to margin preservation. For the Oct. quarter, revenues and EPS were $15.2Bn and $0.37, versus our estimates of $16.5Bn and $0.31. The Street consensus had been at $16.4Bn and $0.32. Revenues were lighter than expected, declining 7.7% year-over-year and 3.1% sequentially. In contrast, gross margins were better than expected at 18.8%. We maintain our Neutral rating. Dell trades at 7.1x our revised calendar 2009 EPS estimate, versus the peer group average of 9.8x. We expect the valuation gap to narrow somewhat in Dell's favor, but we do not expect sustainable appreciation from current levels owing to the macro and Dell's low recurring revenue base.