Although you’ve seen the chart below, we’ll dredge it up one more time in order to make a point: Just because one company is the best comparison for another company doesn’t mean it makes for a good comparison.
In this case, the comparison is between Hewlett Packard (NYSE:HPQ) and Dell, and following DELL’s earnings report, the comparison between the two appears set to look even worse (see chart at end of post).
The reason you’ve likely seen the chart before is that HPQ and DELL are the two largest competitors in the PC industry, with no other publicly-traded competitor really even close. Most of the comments on the issue will focus on how Hewlett is getting more efficient, and eroding DELL’s former advantage in that department. These comments are wrong.
Other than being #1 and #2 in PCs the two really have little in common. DELL gets roughly two thirds of its revenue from PCs. Hewlett, which has more exposure to services and printers, is just one-third exposed to PCs. Meanwhile, Hewlett has twice the exposure to international sales as DELL, which is predominantly a US company. It is easy to see that trends in services, printers or the world economy could lead to significant fluctuations between the two companies.
Hewlett Packard’s PC division reported $6.9 billion in revenue and $275 million operating profit, for a 4% net margin. DELL had sales of $14 billion and operating profit of $605 million, for a 4.3% profit margin. So HPQ has still not caught up by this measure of efficiency (though it is getting close.) Hewlett carries 34 days of inventory (44 days when services are excluded) compared to less than five days at DELL. Hewlett is not even close on this measure.
Make no bones about it: DELL is the best-run PC maker (with the possible exception of Apple) out there. The problem is, being the best PC maker amounts to a back-handed compliment.