Shares of $6.1 billion computer systems company Lenovo Group (LNVGY, Financial)(HKSE:00992, Financial) recently fell to five-year lows brought by a surprising loss of $72 million in its first quarter that ended in June despite nearly flat revenue growth at (-)0.4% to $10 billion.
“In the first quarter this fiscal year, we had stable performance as we executed our three-wave strategy with commitment. We maintained our industry-leading profitability in PC, built the foundation in mobile and data center and further invested in ‘Device + Cloud’ and ‘Infrastructure + Cloud’ powered by Artificial Intelligence.
“We have made solid progress on every front of our strategy. Particularly MBG continued to improve and is on track to break even by second half of this fiscal year. DCG gained good momentum as well. As the two new growth engines gain speed, we believe the sustainable results will soon follow.” –Â Yang Yuanqing, Lenovo chairman and CEO
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Valuations
Lenovo is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 11.5 times vs. the industry median of 21.7 times, a price-book (P/B) ratio of 1.9 times vs. 1.7 times and a price-sales (P/S) ratio of 0.15 times vs. 1.1 times.
The company also had a trailing 6.16% dividend yield with a 70% payout ratio.
Average revenue and earnings-per-share estimates for Lenovo’s fiscal year that will end in March 2018 indicated forward multiples of 0.14 times and 12 times.
Total returns
Lenovo provided (-)3.6% total losses to its shareholders so far this year compared to Standard & Poor's 500 index’s 10.99% (Morningstar).
Lenovo
Lenovo Group Ltd. or Lenovo PC International was founded in 1984 and is a Chinese-American multinational technology company with headquarters in Morrisville, North Carolina, and Beijing.
According to Reuters, Lenovo Group is an investment holding company principally engaged in personal computers and related businesses.
The company’s main products include Think-branded commercial personal computers and Idea-branded consumer personal computers as well as servers, workstations and a family of mobile internet devices including tablets and smartphones. Lenovo also provides cloud service and other related services. The company distributes its products in domestic markets and to overseas markets.
The company operates its business through four geographical segments including China, Asia Pacific (AP), Europe, the Middle East and Africa (EMEA) and Americas (AG).
Review of the fiscal year 2017 results*
China
In the recent fiscal year, revenue in China fell by (-)4.6% from the prior year to $11.79 billion (27% of total revenue) and generated an adjusted pretax margin of 4.6% – same level of profitability in previous fiscal year.
Asia Pacific
Asia Pacific revenue also fell by (-)2% to $7 billion (16% of sales) and delivered (-)$65.2 million in losses compared to $88.5 million in adjusted profits a year earlier.
Europe, Middle East and Africa
Revenue in EMEA fell (-)5% to $11.2 billion (26% of sales) and had losses of (-)$336.7 million compared to $125.7 million in adjusted profits a year earlier.
Americas
Revenue in the Americas fell (-)4% year over year to $13.04 billion (30% of sales) and had adjusted profits of $157.5 million compared to (-)$120.7 million in losses a year earlier.
*No per geographical segment figures were available in Lenovo’s recent press release. See here for further details.
Sales and profits
In the past three years, Lenovo had average revenue growth of 3.6%, a profit decline average of (-)13.2% and a profit margin average of 0.91%.
Cash, debt and book value*
As of March, Lenovo had $2.8 billion in cash and cash equivalents and $3.87 billion in debt with a debt-equity ratio of 1.2 times compared to 1.16 times a year earlier. Overall equity increased by $224 million while debt rose by $388 million year over year.
Of Lenovo’s $27.2 billion assets 30.7%Â were goodwill and intangibles while book value increased 7.5% year over year to $3.22 billion.
*No figures were available in Lenovo’s recent press release.
The cash flow summary*
In the past three years, Lenovo allocated $2.28 billion in capital expenditures, raised $3.19 billion in debt net repayments and other financing activities, generated $369 million in free cash flow and provided $1.21 billion in dividends and share repurchases.
*No figures were available in Lenovo’s recent press release.
Conclusion
Lenovo’s surprise losses in its recent quarter and lack of specific information per specific (geographical) segment performance including current balance sheet and cash flow allocation makes it hard for conservative investors to consider investing and the company’s very appealing dividend yield as an investment option.
Meanwhile, the company carried a leveraged balance sheet and nearly one-third of its assets were goodwill and intangibles while having provided significant amount of shareholder payouts (dividends/buybacks) in recent years considering in contrast to its free cash flow generation.
Analysts have an average hold recommendation on Lenovo’s shares with a target price of $11.14 per share vs. $11.04 at the time of writing.
Despite the appealing yield, Lenovo is a pass.
Disclosure: I do not have shares in the company mentioned.
