HP Is Telling You To Buy These 3 Companies

Hewlett-Packard is a massive company that operates in many divisions, but the recovery of one segment in particular might imply three great buying opportunities.

Feb 25, 2014 at 3:00PM

After years of double-digit annual declines, Hewlett-Packard (NYSE:HPQ) is now seeing a recovery in computers. In the company's fiscal first quarter, it saw PC sales rise 4%, a figure not seen in quite some time. This, combined with comments from CEO Meg Whitman, might imply great investment opportunities in Intel (NASDAQ:INTC), Western Digital (NASDAQ:WDC), and perhaps Seagate Technology (NASDAQ:STX).

Is the PC market improving?
Hewlett-Packard's total revenue for its fiscal first quarter declined by 0.6% to $28.2 billion, but its large PC division saw growth of 4% year over year after dropping 2% in the prior quarter. This particular quarter of PC growth marked the first in ten quarters that sales rose.

In a CNBC interview, Whitman discussed the impact of a Windows refresh, and that while consumers are still purchasing tablets, they are also seeing that PCs are necessary in a new world of big data and analytics. Thus, PCs might not be ready for double-digit year-over-year growth, but have perhaps reached a bottom in a very steep decline.

Intel: A staple in HP computers
HP is known for building strong PCs and laptops, and in doing so has built a very deep relationship with chipmaker Intel. Specifically, Intel's chips can be found in the vast majority of all HP laptops, PCs, and even its servers. Hence, HP's quarterly growth in PC bodes well for Intel.

With that said, Intel is not necessarily guiding for accelerated growth, as revenue and EPS in 2014 is expected to be flat. Furthermore, Intel recently announced plans to layoff nearly 5% of its workforce, which isn't exactly a vote of confidence for growth.

However, in Intel's January earnings report, investors seemed to discount the fact that its PC business was flat year over year, after dropping 3% in the quarter prior. This flat performance showed improvements, and given the fact its 62% of Intel's total business, such improvements might also insinuate a boost for the company, meaning it's possible that Intel is just guiding conservatively.

With Intel trading at just 13 times earnings, far below the S&P 500 average of 19, this strength and hint of a recovery might prove to be a great investment opportunity.

Western Digital and Seagate Technology: Ready to thrive with PCs
Western Digital and Seagate Technology combined control nearly 85% of the hard disk drive (HDD) market; HDDs are storage devices used in PCs, laptops, and an array of other devices like game consoles and DVRs. In the fourth quarter of 2013, the total addressable market (TAM) for HDDs stood at 142 million according to both companies, and Western Digital shipped 63.1 million while Seagate shipped 56.6 million.

If we rewind five-seven years ago, nearly all of these HDDs came from the PC or laptop market, but with an industrywide decline, both companies have made investments in other segments. In particular, Seagate and Western have grown via the cloud, as the data transferred to the cloud is stored on HDDs. Also, both have made investments in solid state drives (SSDs), which are similar to HDDs but used in smartphones and tablets.

With that said, the infrastructure is still in place for significant growth if the PC/laptop market recovers, and the performance of both HP and Intel is a good indication that such a recover is in place. However, it's worth noting that Western Digital has done a much better job at gaining market share. For example, Western Digital's total share of the HDD market stands at 45% while Seagate's is 40%, although each had equal share 12 months ago . Furthermore, while both companies are valued similarly, Western Digital likely presents a better investment opportunity due to its market share gains.

Final thoughts
Essentially, these are four companies that could all thrive if and when the PC/laptop market recovers. While Western Digital is likely a better opportunity than Seagate, it's worth noting that all four present great value.

HP, Intel, Western Digital, and Intel all trade at forward P/E multiples of 10 or below, and all pay an annual dividend. This is value not often seen in this market, but has been created due to a weak PC market. Thus, a recovering market can no doubt take these four stocks significantly higher, and HP is giving us a good indication that this will occur.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Western Digital.. 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.

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