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Computer Manufacturers in a Changing Environment - Is There Value Left?
Posted by: Damian Illia (IP Logged)
Date: August 30, 2013 05:15PM
As the PC market declines, only those companies moving away from it and into the upcoming mobile and tablet technologies seem poised to succeed over the long-run, even though a PC refresh cycle is expected for the short-term. Apple (AAPL), Hewlett-Packard (HPQ) and Dell (DELL) are three of the main players in the computer and related products manufacturing arena. Let’s take a look at them in order to find out which ones stand to benefit from the substitute technologies and their synergies with PCs over the longer-term.
Dell Offers No Delight for Investors
Dell is a leading manufacturer of notebook and desktop computers, software and other peripheral equipment, as well as servers and networking equipment, storage, and services. Although the company has been focusing its efforts on diversifying its product portfolio away from its core hardware business, the hefty spending undertaken has led its stock to plummet over the last few months. This is bad news for investors, but probably good news for its founder, Michael Dell, who has been trying to privatize the company for a while now.
Determined to complete the development of a collection of end-to-end solutions for enterprises, Michael Dell (backed by Silver Lake Partners) declared to be willing to pay $13.75 per share, slightly below the current trading price of $13.76. This added to the company's quarterly dividend of 8 cents per share, and a special dividend of 13 cents per share if the deal was sealed, provide an appealing opportunity for those looking for a short-term investment.
However, Carl Icahn, the famed investor worth over $20 billion, and several other Dell stockholders have been pressuring hard to have the buyout vote pushed back. This could mean that the privatization could not go through, spoiling the plans of those shorting the company’s stock.
If the buyout were to occur, a long-term investment would just not be an option. Nevertheless, if it didn't, I'd still recommend staying away from this stock. My main concerns revolve around the decline of the PC market (on which the company depends in excess) and the lack of competitiveness that Dell holds in the upcoming tablet and smartphone market. Moreover, its large dependence on non-U.S. markets, which account for about 40% of its income, is also worrying, as the company remains a few steps behind its competition in this field as well.
After a weak performance on Q2, Dell’s becomes even less attractive. Trading at 18 times its earnings, almost double its 5 year average and even above the S&P 500’s mean, the stock seems overvalued. And, even though Carl Icahn and Jim Simons buying this stock could lead to believe otherwise, the company still doesn’t provide appealing prospects for long-term investors.
Still Not Late to Take a Bite
News about Apple has been quite positive lately: its recently reported third-quarter results comfortably beat expectations, a new IPhone is expected to be marketed by mid-September and new versions of its operating systems, iOS 7 and OSX Mavericks will also be launched by Fall of 2013. In line with previous releases, these should drive both replacement and first-time sales over the next couple of months.
However, the trending topic in the last couple of weeks has revolved around Carl Icahn disclosing that he has a sizeable position (worth about $1.5 billion) in the firm´s stock.
More good news for shareholders: Icahn has been pushing the firm’s CEO to engage in further share repurchases, even in spite of the fact that the company has already authorized $60 billion in share buybacks, to be executed before the end of calendar 2015.
Although the stock has been experiencing wide price variations over the year, reaching a low point of $393 in July, its current valuation close to $500 a share, or about 12 times its earnings, still looks cheap to me. And apparently, Ichan feels the same, as he stated that even without earnings growth, Apple´s stock ought to be worth $625.
In account of its moated business and numerous catalysts -increasing product synergies, constant innovation, a possible deal with China Mobile, strong ITunes sales and an even stronger balance sheet- this is definitely a stock to add to your long-term, income portfolio (the dividend yield surpasses 2.4% of the stock price).
High Pressure for HP
Hewlett-Packard is the third company in my computer (and related products) manufacturers list. At first sight, its valuation 0.4 times its sales, at a 20% discount to the industry average, might look attractive. Nevertheless, its long-term growth prospects are not at all promising. With analysts expecting it to deliver average annual EPS growth rates under 1%, this is a stock to stay away from. If you hold HP stock at the time, the current price point (up over 56% year to date) provides a good opportunity to sell out. Below you will find the main reasons behind my lack of confidence in this firm:
1) The PC market decline finds HP quite helpless, and its position in the upcoming mobile segment is not at all good. Given the fact that PC sales account for a big portion of the firm´s revenues, this is a reason for concern.
2) Furthermore, the company´s revenues have been experiencing a decline that reached 10% last quarter, year over year, mainly due to decreasing sales across all four of its key business segments.
3) The company faces very strong competition both in its PC and printer markets. Although it leads in both of them, IBM and Dell have been posing a significant threat, forcing the company to lower its prices, thus reducing its margins. Moreover, a weak yen also favors its Japanese competitors, which run on lower costs and are willing to sacrifice their margins in order to offer lower prices.
Although the company has been focusing its efforts on a turnaround, the risks widely surpass the upside potential. This has been reflected in the activity of its largest institutional stockholder, Dodge & Cox, which sold considerable amounts of shares over the last few months. Other gurus like Jeremy Grantham, at GMO LCC; Hotchkis & Wiley; and Richard Pzena, at Pzena Investment Management LCC, have also been selling their HP stock in large amounts. And, in spite of the fact that sometimes swimming against the current pays off, this doesn’t seem to be the case.
Within the analyzed companies, only Apple seems to have what is needed to succeed in a changing technological environment. Although the PC market is declining in general terms, and this will strongly affect both Dell and HP, Apple not only stands to benefit from its substitute products, but also from the interactions that these have with their Mac Computers, which should help keep PC and Notebook sales up. It is still not too late to chip in. I’d say: buy and hold.
Guru Discussed: Carl Icahn: Current Portfolio, Stock Picks
Michael Dell: Current Portfolio, Stock Picks
Stocks Discussed: AAPL, DELL, HPQ,
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