Dell Inc (DELL) stock is too cheap

Dell Inc (DELL) closed at $13.96 on November 22nd, 2010.  Over the past year, DELL has traded in a range of $11.34 to $17.52.

Being a value investor, I am always looking for intrinsically cheap value stocks.  Many times, a particular stock is cheap for a reason (declining business, litigation issues, etc).  In some instances, the market accidentally misprices a stock that still has plenty of growth.  DELL is one of these stocks that is accidentally mispriced.  DELL has plenty of growth while trading at a low valuation.

Let's take a look at the balance sheet from the most recent earnings results on November 18th (3rd Quarter Fiscal Year 2011).

http://i.dell.com/sites/content/corporate/secure/en/Documents/FY11_Q3_rtyu_BalanceSheet.pdf

Cash Equivalents 14B
Debt 6B
Services/Warranty Liabilities 6.5B
Net Cash 1.5B

Market Cap 26.9B
Enterprise Value 39.4B

As you can see, there is 1.5B in Net Cash on the balance sheet, or $0.78 per share.

Next is the Cash Flow section where we can look at the Trailing Twelve Months 
http://i.dell.com/sites/content/corporate/secure/en/Documents/FY11_Q3_rtyu_CashFlows.pdf

Operating Cash Flow (after subtracting Stock Compensation) 3.4B
Capital Expenditures 400MM
Free Cash Flow (FCF) 3B

The market is currently valuing 3B in FCF at 8.5x (subtracting net cash).  The FCF number is more conservative as Account Receivables have grown by 700MM.  A large portion of this growth has been from Dell Financial Services which is no longer in partnership with CIT Group.  (For more information see slide 10 and 32 linked below). 

Taking a look at the growth side, DELL increased revenues by 19% YoY.  The consumer business is turning the corner, breaking even this quarter after net losses previously.  Even though DELL missed the initial push into retail channel (most consumers needs to touch and feel the laptop before buying), DELL is catching up to the competition.  Commercial and Enterprise space are both strong with the Perot acquisition creating opportunities and synergies.

Presentation from DELL investor relations
http://i.dell.com/sites/content/corporate/secure/en/Documents/FY11_Q3_rtyu_Presentation.pdf

As far as valuation, I am looking for a valuation in the range of 10x - 12x conservative FCF for a stock price of $16.50 to $19.80.

Full Disclosure: Long DELL.