The global diversified computer systems industry has grown at a significantly superior rate than the general market since 2008, with the market capitalization recently crossing US$ 290 billion. The industry has also seen a modest revenue growth over the last 3-years and is expected to achieve phenomenal growth in earnings.
Growth US$ 100 over horizon of 2008-YTD
In our review we would be looking at three of the biggest and the most traded companies of the sector. Taken together, Hewlett-Packard Company (HPQ), Teradata Corporation (TDC) and International Business Machine Corporation (IBM) comprise more than 90 percent of the industry capitalization with IBM being as the largest within this sector.
Source: yahoo finance
Hewlett-Packard is a global provider of products, technologies, software solutions and services. HP has faced tough times in 2012 mainly due to declining personal computing [PC] market and strong competition from Lenovo. This together with HP's recent restructuring and change in management has brought about a change in focus for the company towards software and tablet market. Such events have been greeted positively by the market which is evident from recent appraisal in company's stock.
Teradata Corporation , the leading analytic data solution company has recently seen a decline in its dominance within the data warehousing industry due to an increase in the number of competitors. With continuous positive returns, TDC stock has also given the largest total returns in the industry over the past 5-years. Steady revenues and improving efficiency point towards the fact that TDC has successfully multiplied the wealth of its owners.
International Business Machine Corporation , once a giant in this sector, has faced increasing competition over the years. The company has the largest market capitalization and the strongest financial position compared to any of its peers in the industry. Increasing revenues and improving margins have led the stock to continuously post positive returns since 2008.
Rev Growth (3-year Avg)
EPS Growth (3-Year Avg)
Average Expected EPS
Source: Yahoo Finance
IBM and HPQ have seen a lower than average growth in revenues over the past three years while TDC has shown exceptional performance achieving a revenue growth of 10 percent which is more than the industry average. However, if we look at revenue trends over the past two years, the story is a little different with IBM and TDC showing average growth in revenues while HPQ shows a negative growth in revenues. HPQ's poor performance can be attributed to a decline in the PC market, a strong competition from Lenovo and failure of HPQ's WebOS based Smartphones. However HPQ is targeting revenue growth in Software and Servicing divisions, Cloud System Services and the Tablet market which will now reduce the company's dependence on the PC and Printers market.
While HPQ faced negative growth in EPS due to high restructuring costs, IBM and TDC have seen tremendous growth in EPS. This trend is expected to continue into the future with all three companies expected to achieve high EPS figures by the end of the current year.
Operating Margin %(TTM)
Net Margin %
Both IBM and TDC have performed better than the industry in terms of efficiency. Both of the companies have generally been able to improve Operating and Net margin over the past 5-years. HPQ has seen a decline in its Operating and Net margin mainly due to lower gross margins and restructuring costs. However with the restructuring phase gone and the company diversifying into other markets, the company is expected to show significant improvements in its margins over the coming years.
Source: yahoo Finance
IBM and TDC have performed significantly better as compared to the industry but HPQ has been well below the industry par due to heavy losses. However, all three companies have achieved similar asset utilization with an asset turnover of close to 1. Similarly IBM and TDC have achieved high return on assets with HPQ showing a negative ROA due to losses. IBM and TDC are expected to maintain such returns in the future while HPQ is expected to significantly improve its performance.
Given the risk facing the companies, TDC's earnings seem far superior when compared to its peers due to lower risk associated with it, as represented by the Debt/Equity ratio. IBM has successfully conducted several share buybacks over the years which have resulted into a higher than average debt/equity ratio.
Expected Growth %(per annum)
Dividend Growth %(3-year Avg)
All three companies are expected to grow at a rate lower than the industry average but TDC is expected to outperform the three stocks. One reason for this is the 100 percent earnings retention by TDC. HPQ and IBM on the other hand have been offering high dividend yields and experienced substantial growth in dividends, which have resulted into lower expected growth.
Valuation Matrix for HPQ
Valuatio Matrix for TDC
Cash per Share HPQ
Cash per Share TDC
Cash per Share IBM
Equity Value per Share
Value Based on P/E
Value Based on P/S
Value Based on P/B
Value Based on EV/Sales
Value Based on EV/EBITDA
Weighted Average Value
In my analysis shown in the table above, the estimated equity value is calculated as the weighted average value of each stock. It shows that HPQ is relatively undervalued with an upside potential of 59.88%, whereas TDC and IBM are relatively overvalued.
Since HPQ stock value is currently recovering from its 4-year low, it is reasonably undervalued which is also evident in multiples. As the company shifts its focus from PC market towards more attractive software and tablet markets, the future looks more promising. The company has been giving a high dividend yield (2.3%), greater than the industry average, with an average growth in dividends of 13.7%. Based on analyst estimates the company is expected to show positive EPS in the future. Due to its high upside potential of 59.88%, Hewlett-Packard is a buy.