Better Buy for 2013: Hewlett-Packard or Dell?

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Can we just get this year over with? That, or something similar, is surely the sentiment of both Hewlett-Packard (NYSE: HPQ  ) CEO Meg Whitman and Dell (UNKNOWN: DELL.DL  ) CEO and Chairman Michael Dell. What a year. Both PC industry leaders are down considerably year to date and, even with the occasional uptick, can't seem to gather any momentum.

HP shareholders have enjoyed a 25% run of late, but that's since petered out. Of course, short-lived share-price pops tend to happen when it's based on takeover news and other assorted rumors, as opposed to actual financials. Dell's stock price is also trending up the past month, but that's little consolation for longtime shareholders sitting on significant 2012 losses.

HP heading into 2013
If you're a value investor, the negativity surrounding HP could be just the opportunity you've been looking for heading into next year. For Hewlett-Packard, shareholders demanding that HP trim overhead welcomed the Sept. 10 announcement that its expense reduction plans -- including letting 27,000 employees go -- would be expanded.

The business areas taking the brunt of the expense reduction hits, however, are curious. HP's enterprise and services units have both underperformed, so it makes sense that they'll take a hit -- except that with a shrinking PC marketplace, making cuts in the departments that compete in the growing cloud computing and enterprise space, both areas HP is trying to become relevant in, seems odd.

The most recent HP-related news had little to do with expense management, growing non-PC related revenues, or even its declining printer sales. No, Carl Icahn takeover rumors took over the headlines, even as HP continues to deal with the "he said, she said" verbal sparring of the $8.8 billion Autonomy fiasco.

As if Whitman and HP didn't have enough on their respective plates, former HP CEO Leo Apotheker is getting his two cents in, firing off accusatory emails to anyone who will listen. The ridiculousness of Apotheker's intervention pales in comparison with Autonomy founder Mike Lynch, who's setting up his own website so he can spout off. It's an $8.8 billion embarrassment, and the last thing HP needed in the midst of a major, strategic business shift.

Dell heading into 2013
Don't be surprised to see Dell post another revenue decline for its fiscal Q1 in early 2013. Dell, much like HP, is still tied to results in the ever-declining PC market. The upside is Dell continues to make tangible strides to grow revenues beyond PCs. Its efforts to become a significant player in cloud computing, site servers, and enterprise-related services was the impetus for Goldman Sachs (NYSE: GS  ) to up its rating on Dell from sell to buy earlier this month.

If more proof is needed of Dell's commitment to changing its strategic direction, there's the closing of the Quest Software deal, which added to its software services product line. And Dell's acquisition of Gale Technologies expanded its growing enterprise solutions unit. Even with that, changing its strategic focus isn't going to happen overnight for Dell or HP. Either opportunity will require patience.

From a financial perspective, Dell is delivering solid margins across the board, has long-term debt in an amount half of its current cash and equivalents, and sports a decent 3.1% dividend yield. Its trailing P/E is 7 -- including its share-price pop the past month -- and that's about half that of cloud and enterprise competitors Microsoft (NASDAQ: MSFT  ) and IBM (NYSE: IBM  ) . With a forward P/E of 6, Dell is also well below the both Microsoft and IBM based on future earnings expectations.

The envelope, please
The recent analyst downgrades of HP are likely to put additional pressure on its share price, even with its solid 3.7% dividend yield and continued Icahn-speak. Though HP boasts $11.3 billion in cash and equivalents on its balance sheet, with nearly twice that in long-term debt, HP's financial strength isn't quite what shareholders would like. And with another big writedown coming, HP's Q1 earnings call in February will show the third straight quarter of negative operating income.

Dell and HP share prices are both down significantly in 2012 -- 28% and 45%, respectively -- but it's hard to imagine that either will become non-entities. Talk of breaking up HP, much of which is certainly spurred on by the Icahn news, is pure speculation and shouldn't warrant your investment consideration -- yet.

In many ways, the road back to relevance is similar for Dell and HP: Strategically realign their business to better suit current and future market needs. The difference? Dell has fewer roadblocks to executing its transition and is already further along the path. For 2013 value seekers, Dell is the hands-down alternative between the two.

Mobile and cloud computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's shifting its strategy under Whitman's leadership. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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