Dell: The Anti-Hewlett-Packard?

Following up to yesterday’s post on the outright ridiculous valuation being assigned to shares of Hewlett-Packard (HPQ) these days, it is worth playing devil’s advocate and exploring the merits of anti-H-P plays if you believe they will have a hard time convincing its customers that it finally is on the right track. Dell (DELL) should be the primary beneficiary if enterprise customers seek out new vendors, so it would be a perfect way to play the continued demise of H-P.

How does that stock look? Very, very cheap. At $14 per share, Dell fetches about 8 times earnings. But if you dig deeper the stock is even cheaper. Dell has about $10 billion of net cash on the balance sheet, which equates to $5 per share. So investors are really only paying about $9 a share for Dell’s operations, which generate north of $60 billion in annual revenue. With about $5.5 billion in trailing twelve-month EBITDA and an enterprise value of about $16.5 billion, Dell currently trades at 3 times cash flow. Heck, that is not that much more than H-P (2.5 times). Both of these stocks may make a lot of sense at current prices.

Full Disclosure: Long shares of HPQ at the time of writing but positions may change at any time

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4 Thoughts on “Dell: The Anti-Hewlett-Packard?

  1. I can’t and won’t argue on the merits of either stock’s valuation, but I’ll point out that you had similar arguments for RIMM before it got crushed – solid enterprise presence, growing market where even by losing market share you still increase sales etc.
    Yet they were crushed and as market santiment goes it may be for a long time.

    So what was it that you didn;t factor there and that you may be missing here.

    Again, I am not a guru in any way, but let’s consider it may be market expectations that in a new era of tablet devices where neither Dell nor HP have anything to stuff business with they’ll lose a tremendous opportunity to growth sales; worse, they may lose existing sales from businesses which renew their employees’ workstations with new Apple or Android based devices.

    Sure, server market will probably remain stable for a while, maybe printers too, but desktop/laptop which is not insignificant for either company may just vanish under their noses.

    How likely is that to happen? Well perhaps not very likely, at least in near term, at least for business enterprises.

    But schools may as well do – Apple has already had one of its feet in there.

    Another hit will also be the consumer market. Tablets are the hot stock and if Microsoft does not come up with a smoking WIndows tablet this Christmas will sure bring lots of lost revenues to both DELL and HP.

  2. Chad Brand on September 26, 2011 at 8:23 AM said:

    Good comparison. To my recollection, the only other time I have discussed a tech stock at a single digit P/E in the recent past and been wrong is RIMM. The difference this time? I guess I would have to think that there are low odds that a new competitor comes along and launches new and better server, storage, and enterprise solutions. I agree with you that tablets will erode the consumer PC market, but fortunately for HP and Dell, margins on consumer products are so small that most of their profits (though a smaller percentage of their revenue) come from other places.

    The interesting thing is that Apothekar’s strategy shift at HP (spin out PCs, kill off the webOS tablet, buy Autonomy to boost software/services) makes total sense in terms of the trends you point out. He got canned more on the communication of those moves rather than the ideas, so maybe Whitman will still go that direction with subtle changes. All in all, if the enterprise market shifts as quickly as Android and iOS have influenced the consumer market, I think you could be on to something.

    I guess I still see plenty of demand for traditional PCs in the office/business setting, and demand for servers, storage, and software/services. The numbers from HP and Dell haven’t shown anything else yet, but it is definitely something to watch. If we start to see consistent revenue declines in the core businesses of HP and Dell, your bearish case could dead on.

  3. Just to clarify, I am not bearish on HP.

    I do not know enough to have my own position actually, which is one of the reasons I follow this blog.

    Just played devil’s advocate trying to figure a crack in your logic.

    If server/printer/storage markets were indeed the majority of HP’s profit then my arguments would indeed fall flat.

  4. Chad Brand on September 26, 2011 at 5:11 PM said:

    I won’t hold you to it. 🙂 “What could go wrong” is always a good intellectual exercise. I think I read the PC division makes about $2 billion a year in profit, so not a lot, but it drives a lot of printer/server/storage sales so that is why Whitman may decide to not spin it out. Personally, I think they can de-emphasize it without spinning it and hope that is what they decide. They have a credibility problem more than anything else right now.

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