Dell, HP: A Tale of Two PC Makers

PC makers Hewlett Packard (HPQ) and Dell (DELL) posted earnings last week partially lessening concerns that PC manufacturers will follow their tech counterparts in the spending downturn. Intel’s (INTC) recent remarks did not bode well as revenue guidance was lowered by over $1 billion due to softening demand. It is surprising to see the PC makers coping well in a time when electronic spending is poised to decline as increasing unemployment forces people to save their money for essentials.

Hewlett Packard Impresses

HP came out six days ahead of their scheduled earning day to tell investors their fourth quarter results will impress, giving hope that PC makers could weather such an economy. HP posted a 19% or a $5.3 billion increase in revenues over last quarter. Management stated that revenue grew about 5% (excluding any income from Electronic Data Systems which HP acquired earlier this year) with revenues of $127.5 billion to $130 billion. HP’s diversified revenue base includes desktops, laptops, servers as well as printers and printer supplies. The acquisition of EDS will also help the giant weather any storms in the future, although the printer supplies business provided HP with the necessary revenues to beat expectations accounting for over a third of revenues. HP’s success unfortunately could not be mirrored by its rival, Dell.

Dell Disappoints

Dell’s earnings were lackluster in relation to their largest competitor. Missing revenue projections by almost $1 billion, Dell reported an EPS of $0.37 on a 5% drop in net income and a 3% drop in revenues. Dell’s earnings were choppy as they continued to restructure their supply chain and gain market share in the consumer PC space. Although the company missed revenues, it saw the consumer segment rebound from a loss and also experienced $123 million in sales from the Asia consumer division. It is obvious that Dell is struggling and may have to expand into other products to diversify itself as spending is cut further by both corporate customers and consumers alike.

The earnings release of these two tech titans along with Intel (INTC) adjusting guidance makes me wary to recommend the computer manufacturers right now. In the long term, all three will do very well, however in the short and medium term they all have to battle declining consumer confidence and declining share prices. I would look to enter Intel or HP as they become cheaper and offer a great bang for the buck with their diversified revenue streams. Although I like Dell’s products, I feel like they are the weakest of the three investments on the table. Keep in mind that although HP beat earnings, this does not mean consumers will buy more PCs. HP’s printer business helped its earnings out greatly unlike Dell, which still lacks a diversified business portfolio. Do not expect anything stellar from this group going forward, but do stay alert for buying opportunities in this prolonged bear market.

Disclosure: The mutual fund the author is associated with is long INTC.

Comments

[herbert hoover:]

The difference is that Dell fell on their results while HP rose on the news of their FORECAST. Who 's to say that this forecast will prove valid? After all, when was the last time anyone on Wall Street lied to us?

2008 Nov 24 09:25 AM