Are PC Makers Going the Way of the Dodo?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a generally disappointing earnings quarter, things have been particularly bad for PC manufacturers. Giants once upon a time, these big name producers are falling prey to the increasing popularity of mobile computing alternatives such as tablets and smartphones. After troubling reports from both Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ), many investors are left wondering what to do with this industry that seems to be getting rusty. With volumes and revenues down, and as of yet no improvement in sight, is it still worth investing in PC giants?

Dell

Dell is one of the companies that face slowing sales and revenue. This PC maker, with a market cap of $15.4 billion and headquartered in Texas, has underperformed the industry in terms of EPS growth in recent years, a fact that was once again underscored by their most recent earnings release. For Q3 of the 2013 fiscal year, EPS missed by a penny and revenue missed by about $180 million. Revenue was down 11% caused mainly by a contraction in desktop and mobility sales. Net income was down a whopping 47% and guidance also disappointed ending up around $0.03 lower than the full-year estimate. Despite the difficult macro-economic situation, and enduring poor sales, the firm continues to pump money into M&A, a strategy which is increasingly being questioned by analysts. The stock is down almost 40% in the last year.

Hewlett-Packard

Hewlett-Packard, despite their more diversified product range, hasn’t been doing much better in terms of earnings. In figures released today, FQ4 EPS beat by $0.02 but revenue missed by $500 million. The stock was down over 9% before the bell in reaction to the report. PC revenue was down 14% YoY and shipments in both desktop and laptop divisions dropped 12%. Consumer PC revenue was hit the worst with a 16% drop. As if this wasn’t bad enough, the company is involved in a charge related to fraud to the tune of $8.8 billion. A nearly 7-month long internal enquiry revealed these “accounting improprieties” at Autonomy, a recent take-over.

Weakness in PC Sales

The aforementioned companies are not the only ones struggling with a weak PC market. There are a number of reasons for this decline. First of all, the macro-economic situation is not conducive to computer sales, as consumers are left with less money to spend on expensive electronics. This is perhaps less true in the developing markets such as China, where PC sales continue to outperform developed markets. The budget segment of desktop computers seems to be holding up alright across the board, but this is an area where Dell especially has been slow to catch up. Although the launch of Microsoft's Windows 8 was expected to boost PC sales in the short term, this does not appear to have happened yet, perhaps because the operating is more suitable for touch devices.

This brings us to the PC's largest problem, the rise of new mobile computing devices. According to Cowen & Co. analyst Matthew Hoffman, the paradigm that has dominated the industry for the last two decades is shifting. Apple (NASDAQ: AAPL) is the company that has been able to most powerfully capitalize on this shift, in no small part due to its strong iPad sales that continue to eat up market share from other tech manufacturers. For the fourth quarter, the tech giant expects to beat its sales estimate of 21.2 million iPads. With the iPhone 5's strength in Asia, Apple may even be looking to beat sales of 50 million units of the popular smartphone. 

Valuations and Metrics

Some valuations and metrics for these companies are now as follows. Dell trades a P/E of 6.22x, which looks cheap compared to the 11.95x industry average, but as in most cases the stock is cheap for a reason. The price to book is a reasonable 1.56, and somehow the firm has managed to keep a 27.6% return on equity, which is impressive considering its performance. The firm has quite a bit of debt with a debt to equity ratio of 88.6. Hewlett-Packard trades at a negative P/E and a price to book of 0.83. Once again, don’t be fooled by these low valuations. HP has a return on equity of -15.6 and a negative profit margin. Also, its debt is sky-high at almost $30 billion with a total debt to equity ratio of over 93.

Bottom Line

Things are bad and appear to be getting worse for PC manufacturers. Facing slowing sales in the face of growing competition from new technologies, it does not appear as if they will be able to keep up with a fast-changing market. Recent earnings reports from Dell and Hewlett-Packard have done little to instill confidence in this ailing industry, and investors will be increasingly wary of allocating funds to this industry. Those looking to invest in the tech sector would be better off looking elsewhere for value.

 


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dell. 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!

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