$DELL

[Andrew Stepner]

Dell is a really compelling opportunity. You might have to wait until a Sept 2021 catalyst (spin-off), but it's are currently trading at a pretty ridiculous discount to their massive 80% VMWare ($VMW) stake...

Summary

To summarize, $DELL owns 80.6% of $VMW which the market is pricing at $70. Meanwhile $DELL trades at $51. Essentially THEY are paying YOU $19 for the Dell core business (EMC storage and PCs).

Info

The thesis is actually layed out in pretty good detail here whether you prefer the print version or the podcast episode version:

print: https://seekingalpha.com/article/4276643-cash-flow-compounders-dell-fits-bill-egregiously-cheap-multiple

Pod: https://seekingalpha.com/article/4278569-dells-crown-jewel-thomas-lott-podcast

Michael Dell

In the past Michael Dell has orchestrated some chicanery to take advantage of public shareholders. However in this case, Dell shareholders are actually aligned with Michael Dell (and Silver Lake PE). There is massive value to Michael Dell in spinning off $VMW. He can't do it tax free until September 2021, but there are many dollars worth of reasons why you can expect him to do it then.

Debt

Debt is also a piece of the puzzle to Dell core but shouldn’t impact the $VMW stake directly. Most of the debt is non recourse. It is also possible $VMW does something like a special dividend so as to send cash to $DELL. One more piece is that Dell is focused on using cash to pay down debt. At some point they could switch to buying back stock or a tender.

Risk/Reward

Of course other things can happen between now and Sept 2021, but the sum of the parts discount to $VMW is so big and shareholders are so well aligned with Michae Dell, that it seems like tons more upside than downside to me.

How to play it:

VMW hedge - There is something to be said for considering a hedge by shorting $VMW.

Options - I also like the idea of owning $DELL via long dated call options

Waiting - I am also tempted to wait. Since the primary known catalyst is kind of far out (2 years), it is tempting to wait before purchasing. Especially if buying options, the longer one waits, the less time value one has to buy.

I currently own Dell but will probably add if it starts to climb. If it trades flat then I will bide my time. The longer I wait, the more inclined I may be to do it with options. I also think that when I increase my position I will hedge 50% of it with a $VMW short, that way I have partial VMW exposure.

Stepner