Paying Attention to PC Makers Is Not a Bad Idea
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Things over at Dell (NASDAQ: DELL) are starting to become chaotic. Perhaps, I am overly exaggerating, but the Dell Board believes that Michael Dell’s proposal to take the company private is the most intelligent decision for shareholders, pointing out that Carl Icahn has a funding shortfall according to its most recent press release. The investor presentation has been filed with the SEC, and it will be a while before we can all get an inside look at why the Icahn/Southeastern proposal is full of flaws. For now, the press release hasn't changed my mind -- Carl Icahn has a better proposal.
Carl Icahn’s proposal is still superior
Let’s assume that Dell's Board is right about the gap in recapitalization, proposed by Icahn/Southeastern. The decline in dividend from $12 per share to $9.35 per share shouldn’t necessarily be seen as a deal breaker for shareholders. In a previous article, I try to break out the upside potential in the special dividend proposal compared to Michael Dell’s offer to buy out the stock for $13.65. Even if the size of the dividend were to shrink by a couple dollars, there’s still the possibility that the stock could trade at a value greater than $4.30 per share after the dividend is distributed.
The reason this $4.30 figure is important is because it represents the difference between the $9.35 in dividends versus the $13.65 take-over price. If the stock was to trade at a value that is greater than $4.30 after the company distributes the special dividend, investors would be better compensated by going with Carl Icahn’s proposal versus going with the $13.65 acquisition.
Source: Southeastern Asset Management
Southeastern Asset Management (Dell's largest stakeholder) believes that the company is worth substantially more than $13.65 per share. This is backed by the assumption that the company will still generate $1.14 in cash flow per share after paying for the added debt. This implies that the company can remain solvent and provide value to shareholders after the special dividend, which in itself has intrinsic value.
Assuming that a vast majority of Dell shareholders were to hold onto the stock after the special dividend, then the $23.72 valuation estimate could be accurate. The value of a stock is built around a perception of value. The data suggests that investors will gain more with the special dividend than the $13.65 in value that Michael Dell is proposing.
Computers aren’t dead
Contrary to popular belief, I think the post-PC era has been overly exaggerated into the eventual death of computers. You often see media reporting agencies talking about IDC’s projected decline in computing demand for 2013.
However, I believe these calls for the end of traditional computing are a little short sighted. In more developed markets, households have enough income to own both a computer and a smartphone. Part of the appeal in owning a smartphone is that it can be financed through a two-year mobile contract versus computers that have to be bought all at once in a lump sum.
Not to mention, smartphone users find themselves in a position of having strong customer support, with the ability to transfer over files and programs from one device to the next prior to upgrading. The rapid growth in smartphones should be expected because it addresses some of the things that traditional computers cannot.
That being the case, IDC estimates that computing demand will eventually stabilize to a 1.9% growth rate worldwide. If that is the case, then Michael Dell is hoping to buy the computer company at a significant discount prior to the stabilization of computer demand. The CEO hopes to take the cash flow from its legacy PC business and invest it into more lucrative businesses like software and enterprise related services.
I don’t think shareholders would want to miss out on the long-term growth of the company in favor of a short-sighted take-over bid that only put the stock at a 25% premium prior to the take-over announcement. Michael Dell needs to put together a more compelling offer because the company is worth substantially more than $13.65 per share.
Things are getting weird over at Dell. The board room wars with Carl Icahn and Southeastern Asset Management are adding unnecessary uncertainty. Therefore, investors should consider alternatives.
I think that Hewlett-Packard (NYSE: HPQ) is a compelling investment opportunity. I believe that the eventual turnaround in computing demand will happen somewhere between 2014 and 2016. The growth in computing demand will be internationally driven. IDC projects that PC demand will eventually stabilize at a 1.9% growth rate from 2014 onward.
The practicality of having a desktop or laptop computer in the workforce will help keep a floor underneath the demand for computers. Investors will have to concede to the fact that computer demand will not grow at outstanding rates, but at least, the personal computer can still throw off a consistent amount of net income year-over-year.
Meg Whitman, in a series of questions at Sanford Bernstein's Annual Strategic Decision Conference Call, addressed some key concerns. Going forward, she believes that the company is starting to finish the beginning stages of restructuring which involves improving business processes and cutting down the size of its labor force. The second component of restructuring could take a year or so, and involves reducing non-labor costs. The company is primarily focused on increasing cash flow and cutting costs.
Going forward, the CEO believes that the unique assets that Hewlett-Packard has acquired over the years will result in significant gains in its data-center and information technology business. The CEO believes that revenue growth will resume in 2014. This is under the assumption that computer sales eventually stabilize while higher-growth businesses like IT and cloud grow at rates that off-set the moderate decline in computer sales.
Meg Whitman also believes that the lower P/E multiple "priced-in" the concerns of a declining business, or a business that may no longer have long-term growth potential. The CEO believes that going forward, a higher valuation multiple will be priced into the stock as the management team continues to streamline business processes for performance gains, identifies and executes upon revenue growth opportunities along with the implementation of intelligent cost cutting.
A more compelling opportunity is Logitech International (NASDAQ: LOGI). The company sells peripheral devices for computers, which include mouse, keyboards, and webcams. Logitech recently announced an annual recurring dividend of $0.23 per share which amounts to a 3.30% dividend yield.
The dividend is likely to be sustainable, especially if the 2014 IDC forecasts for 1.9% annual computer growth are accurate. If that is the case, then we should anticipate Logitech to report a consistent amount of net income and revenue over the next five years.
The weakness in performance in its latest quarterly earnings release was driven by the fact that European sales have declined 25% year-over-year. The economy in Europe is expected to stabilize, this could take time, but in general, economies do recover, and if investors are patient enough to time a recovery in the broader global economy, yields could be phenomenal.
Analysts back this assumption by projecting Logitech to grow earnings by 114.60% in the current fiscal year, with 57.10% growth in the 2015 fiscal year. Logitech has a compelling dividend paired with significant growth, which merits an investment from risk-seeking individuals.
The computer isn’t dead, and investors shouldn’t sell themselves short to Michael Dell. Investors should consider other opportunities like Hewlett-Packard and Logitech that trade in the space.
The success of these investments is heavily dependent upon the macroeconomic environment, so assuming stability in Europe and computer demand, these stocks could be a compelling value investment opportunity.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Logitech International SA (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!