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Talk about crashing and burning. As if Dell’s share price collapse was not enough, it was forced to recall 4.1m spontaneously combustible batteries.

It is no secret that Dell is malfunctioning. Hewlett-Packard recently outpaced its rival on revenue growth from computers. Meanwhile, Dell’s operating margins have shrunk from more than 8 per cent in recent years to 4.3 per cent. HP’s computer division, having looked structurally unprofitable not long ago, almost matched Dell’s margins last quarter.

Can Dell be rebooted? Probably. Problems have been exacerbated by the slowing PC market, which has played to HP’s strengths. The fastest growth has been overseas and among consumers, where HP is stronger. Dell has expanded in Asia, but is still exposed to US corporations. There, demand is likely to stay sluggish until next year’s planned release of Microsoft’s Vista operating system.

That said, Dell’s execution has been poor while HP got its act together. Dell’s recent price cuts have not yielded the volume increases they once did, putting pressure on profitability. It needs a new formula to keep raising already high market shares without damaging margins further. Dell’s profitability has also been squeezed by the cost of improving customer service and higher-than-expected component prices. The former is an extra cost of doing business. The latter should be corrected to an extent following its woefully late use of AMD chips.

Dell’s malaise will not end overnight. But, in spite of the wave of bad news, it is too early to write Dell off. It has reinvented itself before and still has the most efficient model. Sanford Bernstein estimates the shares trade on about 19 times this year’s earnings. While cheap by historical standards, that is no bargain in the cold light of today.

The crux is whether Dell’s earnings are artificially depressed and the company can claw back its margins. The latest quarter should be a low point, with improvements underpinning the stock from here. But, with HP back in shape, Dell will not re-open anything like the gap it once enjoyed relative to its rival.

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