Downside Risks to HP, Intel Overwhelm Value Story
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the PC business is undeniably in decline, it's not going away anytime soon, in my view. This perhaps can best br seen by the $24 going-private Dell transaction, which is being rejected by shareholders for being too low. This means that the top companies with exposure to the PC business can still count on strong cash flow as they attempt to enter new markets. Below, I review what HP and Intel are doing to adapt.
Hewlett-Packard (NYSE: HPQ)
According to HP's CEO, Meg Whitman, the company is in the initial stages of the turnaround. Since the computer business has not been doing very well, the company is planning to shift to cloud computing, software production, and maybe even providing mobile handsets. This is a good move, and it sheds some hope on the great PC giant.
However, there are challenges ahead, because there are already other companies that have invested and specialized in these areas. For example, in cloud computing, HP will have to face competition from Amazon.com and Salesforce.com. These companies are established and are already doing well in this business line. In software, HP is up against giants like Microsoft (NASDAQ: MSFT) and International Business Machines. In the production of mobile devices, the company will have to work hard to catch up with Apple and Samsung, which are currently leading the market.
In an attempt to cut down on costs, HP announced that it would lay off some 29,000 employees by 2014. But employees may desert HP before it deserts them. General Motors had announced in October that it was going to hire some 3,000 information technology employees from HP. It will be a big blow for HP to lose employees. The resigning employees demonstrate their lack of confidence in the company, which should serve as a waning bell to investors.
Intel (NASDAQ: INTC)
The company is currently working together with Microsoft in an attempt to challenge Apple’s iPad in the tablet market, which is now worth $63.2 billion. Together, the two tech giants have disclosed that they are planning to release more than 12 tablets. The collaboration is working out slowly, and investors will have to be patient to reap any gains from it.
In mid-January, Intel announced its fourth quarter and fiscal year earnings. The results corresponded pretty well with the double-digit decline experienced by the stock. Looking at the numbers, one may be misled to think that the stock is doing alright. The entire year’s revenue amounted to $53.3 billion while cash flow from operations stood at $18.9 billion. The company also paid dividends worth $4.4 billion and repurchased 191 million shares at a cost of $4.8 billion. But the previous year’s revenue was $54 billion, which means revenue fell by 1%. Operating income also dropped by 16%; EPS declined by 11% to $2.13 down from $2.39 compared with the previous.
Thus, while the company has been on the decline from the eroding PC business, it still has considerable cash flow necessary, in my view, to make a successful foray into more popular business segments. The partnership with Microsoft, another cash-rich company, positions it to make a major upset for many bears.
Intel and HP look incredibly cheap at a respective 10.2x and 4.8x forward earnings. With so much of the market focused on the downside, it's hard not to buy on the prospects of a surprise positive beat. However, it's also important to bear in mind the risks. If you are looking for a company with considerably lower risks that could still jump from weakening PC concerns, I recommend Microsoft. The producer is incredibly cheap at 8.9x forward earnings and offers a strong dividend yield of 3.3%. At the same time, free cash flow is stable and yields 8.8%. Despite all of the clamor, the company actually grew by a rate of 7% on the bottom-line over the past five years. Plus, it is 6% less volatile than the broader market.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Microsoft. 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.