The tech industry has enjoyed a solid 2017, so it may seem as if finding undervalued stocks to buy among all the good tidings would be difficult. Fortunately for value investors, there are still bargains to be had, including stocks that also offer high yields.
Three opportunities that come to mind are HP (NYSE:HPQ), Qualcomm (NASDAQ:QCOM), and Cisco (NASDAQ:CSCO). Though each of the industry leaders is on sale for different reasons, for investors with some patience and a love of income, they all offer plenty of upside.
No, PCs aren't dead
When HP announced fiscal third-quarter 2017 earnings in late August, its results were "surprisingly" strong. The surprise, at least for some, was HP's outstanding PC results, not to mention the return of its printing division. Its strength in both key segments resulted in a 10% rise in total revenue to $13.1 billion.
HP's top line included improvements in nearly every business segment, led by a 16% rise in notebook sales to $5 billion, and a 5% jump in desktop revenue to $2.57 billion. Even printing, which has long been a thorn in HP's side, enjoyed a 10% increase to $3.12 billion. The only one of HP's seven business segments that didn't grow was commercial hardware, and that dropped a mere 2% to $986 million.
Overall, global PC shipments sank 4.3% in the second quarter, but HP bucked the trend by rising 3.3%, becoming the No. 1 manufacturer in the world with a 20.8% market share. But investors just shrugged. HP has a 2.7% dividend yield, and is valued at about half its peer average on a price-to-earnings (P/E) basis. Value and a high yield: not a bad combination.
Down but not out
Investors who follow the tech industry have likely heard about the slew of lawsuits alleging Qualcomm's licensing arrangements are anticompetitive. Though Qualcomm settled its snafu with South Korea by writing a $927 million check last quarter, legal troubles with the U.S. Federal Trade Commission (FTC) and longtime customer Apple (NASDAQ:AAPL) remain.
The courtroom drama with Apple negatively impacted Qualcomm's fiscal third quarter, which included an 11% drop in sales to $5.4 billion. What really hurt was the 42% fall in licensing revenue to $1.17 billion, along with a more painful 51% decline in earnings before taxes to $854 million.
Conservative investors in search of high yields and value might ask: Why does Qualcomm warrant consideration? The negativity is factored into Qualcomm's stock price, meaning it's so beaten down there's limited risk. Qualcomm is trading at 12.6 times future earnings, compared to its peer average today of 24. Not only is Qualcomm undervalued, but its 4.2% dividend yield is also twice the peer-group average.
A transition taking hold
The primary reason Cisco is so undervalued is the Street's lack of patience. CEO Chuck Robbins is about a year into transforming Cisco from a provider of routers and switches to one focused on software subscription sales in the infrastructure-as-a-service (IaaS) and other fast-growing markets. The near-term result is that total revenue is taking a hit, but Cisco is delivering where it counts.
The 4% decline in total sales to $12.1 billion in Cisco's fiscal fourth quarter received much of the attention, which is why its stock is trading at a meager 13.8 times future earnings, even though the average P/E ratio of its peers today is a whopping 32.5.
Setting the top line aside, Cisco's recurring revenue climbed 15% year over year to $3.75 billion and now accounts for 31% of its top line, a figure growing with each successive quarter. Another initiative is cutting operating expenses, which Cisco did last quarter by 7% (excluding one-time items) to $3.9 billion. Factoring in Cisco's 3.3% dividend yield and undervaluation, it's a high-yield stock worthy of conservative investors' consideration.
Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.
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