What doesn't compute about the personal computer industry? Dell
The Dell Sell
By Mathew Emmert (MEmmert@fool.com)
As a proud owner of a new Dell -- the computer, not the stock -- I still find their products, and the ease with which you can purchase them, to be untouchable. They make buying a new computer as simple as picking up the latest bestseller from Amazon.com
Despite pricing pressures in the industry, this is a company that will generate over $3 billion in free cash flow (FCF) in 2003. It returns over 15% on its assets, and has a return on equity (ROE) of nearly 48%. Let's face it: This firm is the gold standard, and everyone else is playing catch-up.
After jumping 18% this past quarter, Dell's sales will top $35 billion for the year -- more than the gross national product of some countries. On the other hand, Hewlett-Packard's latest quarterly sales' change began with a minus sign.
The company has continued to charge ahead despite fierce competition. The king of the box makers has achieved double-digit revenue and earnings growth over the past six quarters, showing remarkable strength in one of the worst tech spending environments ever to hit the sector.
Dell is aggressively cutting expenses in-house to increase margins, which are running at 18%. At the same time, it's cutting prices in order to steal even more market share from rivals.
It doesn't take much of an effort to see the HP-Compaq marriage for what it is. You've basically got two companies that weren't competing very well alone, not competing very well together. You can't change a leopard's spots, as they say, and combining a Ringo and a George won't turn them into a Paul.
Dell's decision to go head-to-head with HP in the printer market may seem a bit risky, but why not give it a shot? The firm's direct sales model and trusted name moves product, and there's room here for the company to dramatically increase non-PC sales, an area in which it's already making headway. In any case, Dell and HP together account for one-third of the world's PC shipments, so a little more friendly competition between the big hitters will probably put the hurt on other competitors more than either one of them.
Comments from both companies in recent conference calls seem to suggest HP's (formerly Compaq's) storage business is experiencing some post-merger weakness. Dell, on the other hand is picking up speed in this area as its products improve, though its presence remains small on a comparative basis.
It's true that the firm trades at a full-bodied 31 times forward earnings, but more importantly, the shares trade hands at just 23 times FCF. Granted, that still doesn't qualify as cheap, but for an industry leader with blue sky ahead, it's a reasonable price.
OK, perhaps hiring the pot-smoking teenager as a pitchman wasn't such a great idea, but dude, you should still get some Dell.
The HP Weigh
By Rick Munarriz (TMFEdible@aol.com)
Don't cry for me, Fiorina. The truth is I never left you.
It's easy to dismiss Hewlett-Packard at first glance. While Dell's spurt to the top was mostly organic, HP cheated. It bought Compaq to get there. And it almost got caught cheating, too, because it was one of those rare mergers in which a substantial amount of the votes -- nearly half -- were cast against the proposed $19 billion pairing.
But let's take a look at where HP is today. The company's amazing integration story is worthy of borrowing the marketing slogan of Bounty paper towels -- HP is the quicker picker-upper. It promised billions in shaved expenses after absorbing Compaq. It is now leaner by $3.5 billion in annualized overhead. That's a bigger chunk of savings -- and achieved faster -- than HP had originally publicly projected.
A recent article in Forbes gives an amazing account of the realization process that took place when the two giants sat down to hammer out the unification. As everything from the company's infrastructure down to its supply chain was streamlined, HP had the luxury of cherry-picking the best and most cost-effective traits, products, and corporate philosophies from each original entity.
In doing so, HP has managed to do some amazing things like producing pretax profit margins in the double-digits. Yet this would all ring hollow if HP was doing little more than backpedaling while swinging away with a chainsaw. It's not. As a matter of fact the company has padded its market share during three of the last four quarters. Over the past year, the company claims to have grown twice as fast as the market's overall growth rate.
HP's profitability continues to improve. It has exceeded Wall Street's bottom-line targets every quarter since the merger was completed. With the company comfortable with analyst estimates calling for HP to earn $1.20 this year and $1.45 in fiscal 2004, why pay more than 30 times earnings for Dell when you can own HP for a current-year earnings multiple in the high teens? All of the knocks that HP and Compaq had to take in the past relative to the financial prowess of Dell are fading away as HP continues to awaken from its fiscal slumber.
But there's more. While Dell has always been the market's teacher's pet, the truth is that HP has left the classroom. It graduated. It has moved on to the next level, where being a diversified provider of higher margin information technology products and services falls more into the IBM
Mathew Emmert's new Dell computer is blazing fast, but somehow it doesn't help him meet article deadlines. He doesn't own shares in any of the companies mentioned in this article. I f you'd like to see what he does own, check out his profile. The Motley Fool has a disclosure policy.
Rick Munarriz thinks that Carly Fiorina could beat Michael Dell at the poker table. Then again, if he'd be in a bar brawl he'd rather have a Ringo and a George on his side than just a Paul. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.