NEW YORK – Dell Inc. (DELL) shares broke out to new four-year highs, rising 8 percent, a day after the computer maker surprised Wall Street with an improved outlook for the coming year.
Dell posted a 25 percent increase in third-quarter profit, helped by higher gross margins that reflected lower component costs. The company also said it expects to reach $60 billion in revenue by the end of 2005 — a year ahead of schedule.
Analysts said Dell's comments on the $60 billion revenue target implied it could increase revenue by 18 percent to 20 percent next year. Wall Street's average growth forecast had been 15 percent.
"That's the key reason that you've seen the stock break out of its (established) pattern," said Charlie Wolf, a Needham & Co. analyst who rates the stock a buy. Wolf still holds a portion of Dell shares he purchased in 1996.
The shares rose 7.9 percent to an intraday high of $40.20 in afternoon Nasdaq (search) trading, up from a Thursday close of $37.25 ahead of the company's release of third-quarter results.
At least two analysts raised their target prices on Dell shares, with Bear Stearns setting a target of $52 by the end of 2005.
"We think (the target price) is warranted for Dell as a 'poster child' for Darwinian economics with above-market growth," Bear Stearns analyst Andy Neff said of Dell's brutally efficient sales, manufacturing and distribution model.
UBS analyst Ben Reitzes, who issued a bearish outlook on PC industry growth earlier this week, said Dell's results defied what was happening in the PC industry as a whole.
He projects that PC market growth during 2005 will slow to around 8.5 percent, down from close to 12 percent in 2004.
"We were surprised to hear that (Dell) expects to grow 18 percent to 20 percent in fiscal year 2006 — which would be impressive," Reitzes said in a note to investors following the Dell third-quarter results.
"Our confidence in hitting some pretty good numbers is increasing," Dell Chief Executive Kevin Rollins told analysts during a conference call following the report.
"Now whether that's $58.9 or $59.2 or $61.5 or $60.7, I don't think we know yet," he said referring to his prediction that Dell could reach $60 billion one year ahead of schedule.