Dell looks to 2010 for pickup in PCs

In the midst of a push to diversify and become less dependent on PCs, Dell has stressed profitability over growth, stayed clear of price wars and cut expenses as it tries to push into higher margin businesses such at technology services.

The company, which is heavily reliant on corporate customers, has seen revenue fall 23 percent over its first two fiscal quarters, as Taiwanese upstart Acer Inc supplanted it as the No. 2 PC vendor.

Acer made gains mainly by selling netbooks and low-cost notebook PCs to consumers. But analysts say Dell should stand to benefit next year, as businesses upgrade 4- and 5-year-old PCs and other hardware -- especially with Microsoft Corp's Windows 7 operating system on the market.

"That's the swing factor: how does this corporate refresh play out next year?" said Hapoalim Securities analyst Kevin Hunt. "Dell should be a beneficiary."

Calyon Securities analyst Steven Fox said he does not think Dell's share price has factored in the PC refresh cycle because investors are still unsure about its pace and strength.

Fox said Wall Street may be concerned if Dell's PC market share losses continue, but he added that it was not the ultimate measure of the company's health.

"From an investors' standpoint, if they are growing profitably we shouldn't care as much about absolute market share," he said.

Wall Street is expecting fiscal third-quarter earnings of 28 cents a share on revenue of $13.2 billion, according to Thomson Reuters I/B/E/S. That compares with EPS of 37 cents on revenue of $15.2 billion in the same period last year.

Analysts will also be watching Dell's margin to track the progress of its multibillion dollar cost reduction effort. Analysts expect a gross margin of 18.2 percent versus 18.8 percent last year.

The median price target on Dell's stock is $17, or 6.6 percent above its Tuesday closing price of $15.95.

Dell trades at around 15 times estimated forward earnings, compared to about 12 times for larger rival Hewlett-Packard Co. Dell shares have gained around 50 percent this year, while HP's are up roughly 40 percent