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Dell sinks after analyst cuts rating
Citigroup analysts cuts the stock to 'sell' from 'buy', reduces price target, citing gains by competitors.

NEW YORK (CNNMoney.com) - Dell stock tumbled Friday after a Wall Street analyst cut his rating on the nation's largest maker of personal computers.

Dell (Research) shares sank more than 3 percent in early trading on Nasdaq.

Citing an erosion of the company's long-time advantages when it comes to pricing, Citigroup analyst Richard Gardner issued a sell rating on the stock. Gardner, who previously rated the stock a buy, cut his price target to $28 from $37.

"Dell management has been vocal that the business model functions optimally when PC and server units are growing above market – this has not been the case for several quarters," he wrote in a note to clients.

Falling PC prices and increased competition from resurgent rival Hewlett-Packard caused Dell to issue disappointing sales outlooks for two consecutive quarters. Dell stock tumbled 28 percent last year while shares of HP soared 38 percent on the heels of a major restructuring under new CEO Mark Hurd.

Citigroup's Gardner wrote that Dell's challenges last year stemmed from its competitors, who closed the gap between themselves and Dell during the past five years by reducing their inventory lead times.

Dell, which only sells its PCs directly to consumers via phone or Internet, boasted a famously efficient supply chain that only required a few days' worth of raw materials and "work in progress" inventory.

According to Gardner, over the past five years, Dell's competitors have emulated its model and improved their "build to order" capabilities, allowing them to cut inventory.

But he estimates Dell's direct sales model still gives the company a 10 percent cost advantage over its competitors.

Gardner adds that Dell is also exposed to the slowest-growth segments of the PC market, such as mid-sized corporate, government and education buyers in the U.S., Western Europe and Japan. At the same time, Dell has no significant exposure to rapidly growing consumer markets outside the U.S., Gardner wrote.

The analysts concluded that Dell needs to reinvest in important areas such as post-sale support, particularly with consumer and small business customers, as well as to price more aggressively versus competitors to try to gain market share.

"In our view, it would be preferable for Dell to reduce margins, and even near-term growth, rather than destroy 20 years of brand equity," Gardner wrote.

Gardner does not own shares of Dell, but Citigroup does investment banking business with the company.


Lenovo turns slowly toward U.S. consumers: Click here.

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