PC Dead? Well The Trio Doesn't Think So
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's quite interesting to notice a so called "comeback" that's happening in the PC world. The launch of Windows 8 by Microsoft has thrown PC manufacturers back in the game with over 60 million licenses sold since launch. The question of PC or tablet is now being re-analyzed. Leaving the whole argument of PC vs. Tablet and Mac vs. PC, let's take a look at what 2013 has in store for the PC giants and who's in the driving seat for now.
Hewlett-Packard (NYSE: HPQ) recently acquired the software maker Autonomy, this has turned out to be arguably one of the worst acquisitions ever. Hewlett-Packard did not perform adequate due diligence before making such a wild investment and now this move is being called the joke of the year by investors. Clearly, Hewlett-Packard and Dell (NASDAQ: DELL) have been trying to diversify their business over the past few years with both of them having different results. The end objective of both these giants is to stay in par with IBM (NYSE: IBM) as far as diversity is concerned. Keeping 2013 in mind lets analyze which of the three would be the safest bet.
Financial performance of the Trio in 2012
IBM has been trading at price multiples quite near the industry average, whereas DELL and HP are trading below the industry average. In figures, the industry P/E average is at 13.9, Dell is at 7.1, and IBM is at 13.8 (closest to the industry average). These figures justify each company owner's earnings. In 2012, HPQ reported a loss of $5.61 Billion, whereas Dell profit figures went up to $3.1 Billion and IBM is at whopping $13.08 Billion. The decline in HPQ owner's earnings is a testament to the fact that HPQ is and should remain a cheap stock, whereas IBM deserves to be up at the top with other premium stocks.
Let's take a look at the return on invested capital figures of these three giants. Return on invested capital is basically the return dollar generated from a business investment. In 2012, the ROIC for IBM was 70.04%, Dell was at 36.94%, and HPQ was at a disappointing -43.17%. The figures quoted so far show how well IBM is doing, but 85% of IBM earnings are from services and consulting business. HP and Dell are yet to diversify their respective businesses to that extent.
HPQ provides a dividend yield of 3.77% which is the highest as compared to Dell's 1.60% and IBM's 1.74%. When it comes to cash flow generation HPQ is in a very strong and stable position. HPQ operating cash flow during the fourth quarter alone was $4 billion and a total of $10.6 billion in 2012. These funds helped HPQ to pay off some of its debt as well.
Hardware, as far as IBM is concerned, consists of only 15% of its business, which means that software and consulting is what IBM is concentrating at right now. Though Hewlett-Packard and Dell are trying to pursue a similar direction, Dell already generates 31% of its sales through services and consulting. HPQ has set a target of 9% sales through software by 2015, as of now that seem pretty far off. Cloud computing, enterprise, and software are the areas where HPQ and Dell are shifting focus to, a place where IBM is pretty dominant.
One of the most important factors for an investor is to monitor a company and also the sectors that specific company is planning to venture in. IBM is a steady stock and what you see is basically what you'll get. This itself is good enough keeping in mind the performance their competitors. HPQ and Dell are yet to make strong moves on software, cloud computing and enterprise. HPQ's and Dell's performance in hardware would be the key as far as predictions go with regards to their future venture. These three sectors are very promising considering the scope of revenue involved. Cloud computing is the sector both HPQ and DELL should concentrate on, any announcements with regards to cloud computing would definitely excite their investors.
IBM is in the driving seat as far as long term stock investments when compared to DELL and HPQ, but calculating an accurate stock price prediction is a tough proposition. Hewlett-Packard has an uncertain long run, but a good dividend yield and stable cash flow generation in the recent past suggest that the stock would have a better short term run among the three. As far as Dell is concerned, the present dip in the share price of the company creates a small opportunity for purchase before the price starts climbing.
2013 promises a twists and turns for both HPQ and Dell. I'd be surprised to see Dell dipping further as far as stock value is concerned, their margins have always been steady over the years and they are yet to make a mark in enterprise and software. This year is where all of Dell's investments to enter uncharted territory is going to start paying them back. A lot of talk is going on about Dell's take-private deal set to take place soon, but as things stand the deal is said to lose momentum and that might be a concern for investors. Bankers are pretty confident the deal will go through, if it doesn't you could see a steep dip in the share value. The deal is expected to be confirmed very soon and is valued at $ 22 billion making this one of the biggest take-private deals in recent years. Thus keep your eyes wide open, an awesome windows of opportunity coming your way.
tonythomas133 has no position in any stocks mentioned. The Motley Fool owns shares of 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!