November 19, 2010 / 1:50 PM / 9 years ago

Dell rises on expectations of solid sales to government

(Reuters) - Shares of Dell Inc rose 5 percent in pre-market trade on Friday, a day after the personal computer maker raised hopes that government and corporate spending was holding up and prices of PC components were falling.

Dell founder and CEO Michael Dell delivers his keynote address at Oracle Open World in San Francisco, California September 22, 2010. REUTERS/Robert Galbraith

The company’s comments about good demand at its federal customers come barely a week after Cisco Systems warned of weak public-sector spending.

Dell beat third-quarter gross margin expectations, but the market will be watching for margin sustainability as the sales mix shifts toward the consumer during the holiday quarter.

“We do find it somewhat curious that it (gross margins) would suddenly be much higher this quarter after several quarters of disappointment,” Kaufman Brothers said.

“Moreover, product mix wasn’t favorable toward its higher margin enterprise business where servers, networking and storage declined,” it said in a note to clients.

The brokerage maintained its “hold” rating on Dell’s stock and said the company needs to take more aggressive steps to reinvent itself.

Dell has been trying to improve profitability, sometimes through acquisitions to diversify its portfolio, but has been somewhat stymied because of its heavy reliance on sales of low-margin PCs.

It is also pushing into mobile with smartphones and tablets as it seeks new growth markets, but that effort has yet to gain traction.

RBC Capital Markets, which raised its target price by $1 to $16, said Dell will have to show multi-quarter margin expansion to revive investor confidence in the business model.

Susquehanna said favorable component pricing, which accounted for most of the third quarter gross-margin growth, looks unsustainable as it works through the supply chain.

The brokerage raised its price target to $15 from $14, but kept its “neutral” rating.

Shares of the Round Rock, Texas-based company were up 4 percent at $14.15 in trading before the bell. They closed at $13.67 on Thursday on Nasdaq.

The stock has risen 14 percent since the company reported second-quarter results on August 19.

Reporting by Sayantani Ghosh in Bangalore; Editing by Maju Samuel

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