Dell Technologies Inc. (DELL) shares jumped 8.5% in extended-hours trade Wednesday after the PC maker said it plans to proceed with a spinoff of its 81% stake in enterprise software firm VMware.
The deal, which both parties expect to close in the fourth quarter, will see Dell and its shareholders receive a collective one-time cash dividend of $11.5 billion to $12 billion from VMware. Management said it intends to use the proceeds from the transaction to pay down debt and position the company for an investment-grade credit rating.
“After a comprehensive review of potential strategic options, both parties determined that this transaction will simplify capital structures and create additional long-term enterprise value,” Dell said in a statement cited by CNBC.
Through Wednesday’s close, Dell stock has a market capitalization of $70 billion and trades 26.48% higher since the start of the year. Over the past 12 months, the shares have gained around 125%. Valuation wise, the stock trades at 11.39 times projected earnings, slightly above its five-year average multiple of 10.64 times.
Wall Street View
Earlier this month, Morgan Stanley analyst Katy Huberty raised the investment bank’s target on Dell to $107 from $98 while maintaining her ‘Overweight’ rating. As well as being bullish about the VMware spinoff, Huberty believes higher PC demand and exposure to the mid-market supports earnings moving forward.
Broker research elsewhere remains mixed. The stock receives 12 ‘Buy’ ratings and 9 ‘Hold’ ratings. Currently, no analysts recommend selling the shares. Twelve-month price targets range from a Street-high $110 to a low of $79. As of yesterday’s close, the shares trade at a 3% premium to the $90 median target.
Technical Outlook and Trading Tactics
Dell shares have remained in a steady uptrend over the past year, with gains accelerating in recent weeks. This may indicate that investors have baked in most of the positive news surrounding the VMware spinoff. Furthermore, the relative strength index (RSI) has made a shallower high relative to price over the last month, suggesting waning momentum from the bulls.
Active traders should think about taking a short sale if the stock stages an intraday reversal Thursday. In terms of trade management, look to buy back the shares near last month’s swing low at $84.81. This area also finds support from the 50-day simple moving average (SMA). Protect capital with a stop-loss order placed above the high of today’s price bar.
For a look at today’s earnings schedule, check out our earnings calendar.