The last time we applied a value screen to the technology industry, the list was understandably dominated by highly cyclical semiconductor companies. By relaxing our valuation metrics a little and taking advantage of the Screener.co stock screener's ability to mix advanced qualitative and quantitative criteria, we can look for non-semiconductor tech companies that are attractively valued by applying the following screen to US-exchange traded companies.
As of April 17, this screen produces 29 results. We can use market cap as our ranking condition and limit ourselves to the top 10 results, which are:
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Nokia Corporation (ADR)
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Canon Inc. (ADR)
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Cisco Systems, Inc.
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Ingram Micro Inc.
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Tech Data Corporation
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LG Display Co Ltd. (ADR)
Research In Motion Limited (US)
It is surprising to see so many "name-brand" large-cap technology companies trading at less than 8x EV/EBITDA ratios at a time when many analysts are talking about a new tech bubble.
Hewlett-Packard is trading at a 6.9x EV/EBITDA ratio despite posting 10% revenue growth YoY; Microsoft is trading at a 6.3x EV/EBITDA ratio and had 6.9% YoY revenue growth; Dell is trading at a mere 4.6x EV/EBITDA ratio and had 16% YoY revenue growth. All three companies' fortunes are tied to the PC and server markets, which are much slower growing than mobile and tablet devices, so it makes sense that they are trading at a substantial valuation discount to companies like ARM Holdings (ARMH
) that make cell phone and tablet processors and are projected to realize much higher growth.
However, for value investors, if you believe that business IT spending will not collapse and consumers will still buy and upgrade their laptops and desktops, these companies look attractive at the current levels. I have personally been long MSFT since the 15.51 level, when it was trading at an EV/EBITDA ratio closer to what DELL is trading at now. I am definitely watching HPQ and DELL.
Nokia and Research In Motion are losing market share in the fast-growing smart phone market in the face of strong competition from iOS (AAPL
) and Android (GOOG
) devices. With 4.6x EV/EBITDA for both Nokia and RIMM, they are in "value territory" despite being in one of the hottest markets out there. Nokia used to be dominant in the smart phone category, with a very strong European presence despite its limited share in the US market. Similarly, RIMM was the default smart phone choice for enterprises, while it now faces competition in that segment from iOS and Android.
Their current market positions are weak, but the market is growing so fast that, even if their share erodes, it is possible that their growth continues in the near term simply because the market is growing so fast. In addition, investors seem to be counting them out and assuming that iOS and Android will continue to gain share at their expense. I will definitely keep an eye on these two companies.
Canon is an imaging (cameras, printers, copiers, etc.) electronics company trading at a 5.9x EV/EBITDA ratio. The company has over $9.7B of current assets less total liabilities, so its balance sheet is very strong. However, the long term outlook for dedicated camera devices is not good, as evidenced by Cisco's recent closure of its Flip division. In addition, the "paperless office" trend, coupled with the introduction of tablet devices to the enterprise, does not bode well for business imaging devices in the very long term. I am passing on this one.
Cisco is the world's largest network equipment company and is trading at a mere 6.3x EV/EBITDA ratio. As connected devices proliferate, and more high-bandwidth (i.e. video) content is delivered over IP, I have to believe that there will be more demand for network infrastructure products that increase bandwidth capacity across the entire length of the network (backbone to endpoint). The company has a very strong balance sheet and growth projected even in the next two years, according to Yahoo Finance. I am watching CSCO closely.
Ingram Micro is an IT products distributor that is trading at an 4.9x EV/EBITDA ratio. Business IT spending cycles have a large impact on the segment's performance. I bought into PC Connection (PCCC
), another IT distributor, only because it was a profitable business trading at only a modest premium to its net current assets at the time. IM is in a similar position today, but the bulk of its current assets less total liabilities are in inventory. As a result, I believe it is a bit less of a bargain.
Tech Data is an IT products distributor and logistics support company trading at a 5.5x EV/EBITDA ratio. Like IM, its current assets less total liabilities are tied up mostly in inventory and it is trading at a slightly richer valuation than IM. As a result, I am passing.
LG Display Co. makes the components used in LCD televisions and monitors and is trading at a 5.2x EV/EBITDA ratio. Its gross margins have compressed over the last two years even as its revenue has increased. LCDs will likely face increasing pricing pressure even as units shipped increases, because it is a highly price-competitive market. As a result, I am passing.
Disclosure: I am long MSFT, PCCC.