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Over the last 12-24 months there have been many conversations discussing the life expectancy of the PC sector. In the midst of weakening sales and very dismal earnings, I still think that a value proposition exists for potential shareholders. In this article I wanted to focus on two companies within the PC sector that have fallen at least 20% for the year, yield at least a minimum of 3.50%, trade a maximum of 10 times current earnings, and present a value proposition of at least 10% when applying Graham's Number.

The first of these companies is Dell Computer (NASDAQ:DELL) which currently yields 3.50% ($0.32) and has traded down 34.76% on the year. In my opinion there are two positive catalysts to consider when it comes to the company. From a value perspective, shares currently possess a P/E ratio of 6.50 and trade at a 1.25% premium to its 50 DMA and a 16.08% discount to its 200 DMA, which signifies it is trading fairly inexpensively. The second thing to consider is the very nice value proposition the company presents to potential investors when Graham's Number is applied. DELL's diluted TTM earnings per share at 1.47, and a MRQ book value per share value at 5.87, implies a Graham Number fair value = SQRT (22.5*1.47*5.87) = $13.93. Based on the Tuesday's closing price of $9.77, this implies a potential upside of 29.86% from current levels.


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DELL data by YCharts

Are there any negative catalysts to consider even though Dell presents a viable value option for investors? If Dell's M&A activity continues down the same path it has over the last five, shareholders could be in for more of the same results heading into 2013. According to a recent article by my fellow SA contributor Merjerz, "Doing M&A right is absolutely crucial for Dell, since the company has made M&A its main catalyst of change and renewal. As a reflection of just how important M&A is to Dell consider the report from BusinessWeek in 2009 Dell that directed heads of its business units to scout for deals, and even tied part of their compensation to company growth through acquisitions. M&A is not just a piece of their strategy - it is the dominant execution mechanism".

When it comes to Dell, I think the company needs to abandon its PC business and focus on the development behind its very successful line of laptops. According to Dave Johnson, who heads up Dell's corporate development business, noted that "laptops and PCs have accounted for 54% of all revenues and although PC sales are declining, Laptops have held steady at a rate 31% of Dell's total revenue in recent years. PCs are still over 20% of revenues and even though there may not be much revenue growth from these sectors, and margins are getting squeezed, there is still a lot of money to be made by selling services for those devices." If the company can strategically rid itself of its struggling PC business and as a result improve sales of its laptops, revenues could certainly improve.

The second of these companies is Intel Corp. (NASDAQ:INTC) which currently yields 4.60% ($0.90) and has traded down 18.70% on the year. In my opinion there are two positive catalysts to consider when it comes to the company. From a value perspective shares currently possess a P/E ratio of 8.60 and trade at a 7.20% discount to its 50 DMA and a 19.37% discount to its 200 DMA, which signify they are trading a bit on the cheap side. The second thing to consider is the application of Graham's Number and the upside potential it presents to investors. INTC's diluted TTM earnings per share at 2.29, and a MRQ book value per share value at 9.89, implies a Graham Number fair value = SQRT (22.5*2.29*9.89) = $22.57. Based on the Tuesday's closing price of $19.93, this implies a potential upside of 11.70% from current levels.


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INTC data by YCharts

Are there any negative catalysts to consider even though Intel presents a viable value option for investors? If Intel's R&D-related behavior continues impact earnings as it had in the third quarter, shareholders could be in for more of the same lackluster through much of 2013. According to a recent Motley Fool article by Lior Cohen, "the company's revenues declined by nearly 0.3% compared to the second quarter of 2012 and by 5.5% compared to same quarter in 2011. Moreover, the company's operating earnings also fell nearly 15% compared to the Q3 2011. Nonetheless, one reason for the drop in operating earnings was the rise in research and development expenses: in Q3 2012 the R&D provision rose by nearly 22% compared to Q3 2011. This provision is nearly 27% of the total operating expenses. The rise in R&D suggests there is potential future growth, if the company's innovations will convert to sales."

If R&D is going be as important as the emphasis the company has given it is, then Intel will need to start adding the wow factor to many of its products in process. For example, many consumers are making the shift away from desktop consoles and moving toward thinner, faster and more powerful laptops, and as a result they want chips that are smaller, faster and sexier then what was found in many of their outdated PCs.

Source: 2 Value Propositions Located At The Heart Of The Tech Sector