Worth the Risk?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The technology sector is an interesting one these days. There are some tech stocks that look attractively valued, such as Apple and Google, and others like Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) that appear to be fantastic bargains. Value investors want to know if old school tech stocks like HP are really bargains, or just value traps.
Some of the numbers seem to support the argument that Hewlett Packard is a value buy. As you can see, HP is generating cash from financing and increasing the amount it is making from that source.
The three big-name tech companies that HP is usually benchmarked against in this category-IBM (NYSE: IBM), Intel, and Oracle - all lost money from financing, according to the latest figures. IBM lost $11 billion from financing, Intel lost $9.25 billion, and Oracle lost $8.40 billion. HP has figured out how to make money from something its competitors are losing money from.
The problem here is that cash from financing is only a small part of HP's revenue picture. The company's overall revenues fell substantially in the last year, as you can see. Despite the fall, HP's revenues are pretty respectable at $122.5 billion. Hewlett Packard's revenues were much higher than IBM's, at only $104.69 billion last fiscal year.
If that wasn't enough, Hewlett Packard also has a lot of cash; it had a free cash flow of $2.07 billion as of July 31. More importantly, that cash flow was increasing, even if revenues were falling. The interesting thing was that Oracle's free cash flow of $5.53 billion was twice as big as HP's, even though Oracle's revenue was less than a third of HP's. Oracle's revenues were $36.93 billion on Aug. 31, compared to Hewlett Packard's $122.52 billion.
Hewlett Packard's performance is a mixed bag; the company's making a lot of money, but it is having a hard time maintaining its position. Part of the reason for this might be declining demand for its core products, such as PCs and laptops. Although Hewlett Packard is trying its best to regain market share, the company reportedly wants to ship 40 million notebook computers in 2013.
That kind of sales might be part of the problem; the market for a lot of tech products is saturated. The only way companies like Hewlett Packard, Google, Samsung, and Lenovo can compete is to sell more gadgets at lower and lower prices. They can't charge the premium prices like Apple can, so the companies end up generating less revenue on more production. The situation is made worse by the entry of companies like Microsoft and Google into the manufacturing sector.
This might explain Hewlett Packard's P/E 10 ratio, which has been falling faster than its stock price. The company appears to be losing value, but it isn't the only computer-maker struggling to maintain its value. IBM is in a similar situation even though its P/E ratio of 10 is still very high.
So the question is can you make money in computer manufacturing anymore? More importantly, do computer manufacturers other than Apple have any real value anymore? Perhaps, because people and businesses still need computers--but the market is saturated.
Yet even with that saturation, Hewlett Packard looks like a bargain because it does appear to be under-priced. Any company that has revenues of $122.52 billion and $9.50 billion in cash on hand is a bargain at a $23 billion market cap. Hewlett-Packard has become a classic Ben Graham value right now. The company's share price is low even though it has demonstrated an ability to generate cash in a bad economy.
The only problem with this scenario is that Hewlett-Packard is operating in a saturated market. Even with new gadgets like tablets, the computer market is saturated, and the only way manufacturers will be able to compete is with deep discounts. That means that HP faces a serious struggle to retain what value it has left, and has few opportunities to increase value. Hewlett-Packard is certainly a bargain, but it also comes with some serious risks that might sink what little value it has left.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Dell and International Business Machines. 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!