Fighting The Death Of The PC

 |  Includes: DELL, HPQ, IBM
by: Fusion Research

The introduction of smartphones and tablets has heavily affected the market share of personal computers, or PCs. Globally, the PC market shrank by 13.9% in the first quarter of 2013, compared to last year's first quarter. The 2012 shipments were ruled by smartphones and tablets covering 70.8%, compared to 29.2% of desktop and portable PCs. I have analyzed two PC manufacturing companies that are diverting their focus from the PC segment. Let's find out what strategies these companies have developed to sustain in the market.

Protecting PC margins

The IDC report described personal desktop sales for Hewlett-Packard (NYSE:HPQ) as negative, with a decline of 24% year over year. Overall, the personal desktop market was down by 14% year over year at the end of 2012. This led HP to a loose a revenue opportunity worth $1 billion. Earlier, during every Windows operating system, or OS, update, demand for personal computers was witnessed. But with the Windows 8 OS, sales have declined at a high rate. It has sold only 40 million licenses in the past five months, compared to 60 million sold in the first two months of the launch on Oct. 30, 2012. Analysts expect a further 5% - 8% decline in PC sales in the second half of 2013. Comparatively, Dell (NASDAQ:DELL) saw a fall of 11% year over year in first quarter of 2013. Dell has always priced its products aggressively, keeping in mind the nature of competition, as well as the trend in the market. The prior weaker shipments will pressurize the company to price more aggressively. This will further weaken its gross margin. Therefore, a further fall of 6.4% in revenue is expected in the second half of the fiscal year. I will not advise investors to make any position in Dell for now.

On the other hand, HP is gaining on its financial service business. HP's Financial Services is dependent on its interest-earning assets. It consists of equipment on operating lease, capitalized profit on inter-company leases, and financial receivables. Its assets increased from $9 billion in 2007 to $12.6 billion in 2012. This increase in growth is due to financing origination, where a huge amount of financing for equipment- or software-related services is provided to customers. The above figures reflect higher sales that are expected to grow to $14 billion by 2014.

HP announced last year in May that it has planned a restructuring model to properly streamline its business processes. The company plans to cut its headcount by 29,000 by the end of this year. It has already reduced 18,800 jobs. HP plans savings of $3 billion to $3.5 billion from this restructuring plan every year.

Divestment and immigration bill on cards

International Business Machines (NYSE:IBM) is in talks with Lenovo (OTCPK:LNVGF) to sell its x86 server business. This deal is said to be priced between $5 billion and $6 billion. If the deal takes place, IBM will benefit from accounting gains in the second half of fiscal year 2013. By divesting less profitable business and focusing on higher-margin services, the company will offset a restructuring charge of $1 billion in the second quarter of 2013. Investors can expect a rise in IBM's gross margin upon completion of the deal.

IBM had cash flow of about $6.2 billion remaining in the first quarter of 2013. It plans to repurchase shares and an increment in dividend upon completion of the deal. The company has planned to increase its dividend to $0.95 from $0.10 for the second quarter of 2013, as expected by analysts. It has also planned a share repurchase authorization of $5 billion. Return of cash flow in the form of dividends and share repurchase, stable revenue, and competitive strategies make IBM a defensive stock with a positive track record.

As per proposed legislation in the U.S., double fees will be charged from IT companies which have more than 50 employees, more than 30% H-1B visa employees, or less than 50% H-1B visa employees. After this proposed legislation, the U.S. IT service companies will be able to recruit more foreign employees to their workforce compared to other international companies. The U.S. government has already issued around 130,000 visas, of which 80% to 85% were issued to Indian outsourcing companies in 2011. Henceforth, the proposed legislation will increase the filing fees for companies that have more than 50 employees or more than 50% H-1B visas. The said fees will increase from $5,000 to $10,000. These hiked fees will majorly impact Indian IT companies like Wipro (NYSE:WIT), Infosys (NASDAQ:INFY), Cognizant (NASDAQ:CTSH), and Tata (NYSE:TCL). All of the companies have more than 50% H-1B visa employees. Here, the U.S. companies like IBM will benefit from the incremental cost imposed on Indian IT companies. IBM's global services division contributes 60% of the company's revenue. If the bill is passed, investors can expect a modest tailwind in IBM's gross margin on a long-term basis.


HP has been facing tough business in the personal computer segment. Its restructuring plan and financial services segment will provide an aid to its falling revenue. I recommend a buy for long-term gains.

With activities like divesting its x86 server business, share repurchase, and timely dividends, IBM proves to be an investor-friendly company. I recommend buy as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.