By Douglas Ehrman
In the ever expanding world of technology, some of the most critical companies to keeping that expansion vibrant are hardware companies, such as those discussed below. These companies are leaders in their space and offer investors aggressive ways to participate in this expansion. While it is often easy to overlook the role that they play, choosing instead to focus on the ‘sexy’ part of the market, these companies should be a part of every investor’s portfolio. What follows is a discussion of six top hardware companies, as well as comparison of each to their competitors and the overall market. This discussion will not focus on juggernaut Apple (APPL), which plays by its own rules now, nor will it cover the networking giants including Cisco Systems (CSCO), Juniper Networks (JNPR) or River Bed (RVBD).
Hitachi, Ltd. (HIT) – This company, when compared to competitors like Fujitsu, Ltd. (FJTSY.PK), NEC Corp. (NIPNF.PK) and Ricoh Co. Ltd. (RICOY.OB), offers the best blend of value and income within its unique space. Of the four companies, only RICOY.OB carries a higher dividend yield at 4.5%, over HIT at 1.3%, while the other two pay no dividend at all. While on this alone RICOY.OB is attractive, with an operating margin of 2.5% relative to 4.4% for HIT, any problems at the former and it is not hard to see a dividend reduction; FJTSY.PK has an operating margin of 2.4% and NIPNF.PK is at 1.7%. To the extent that they carry meaning at all, the price-to-earnings ratios are led by HIT at 118, followed by FJTSY.PK at 127 and climbing from there. On these valuations, the stocks are obvious value plays, but for those wanting global diversification, it is important to own a strong player out of Japan – HIT stands out in this space. Inside the U.S., Seagate Technologies (STX) also looks well positioned for those looking for a more domestic player.
NCR, Corp. (NCR) – While this stock is outshone on certain metrics by IBM (discussed below), it is the strong growth story in the segment among the direct competitors that are discussed. As a leader in both the Automated Teller Machine and Point of Sale spaces, the company has positioned itself for strong growth looking forward. This is evident when looking at its price-to-earnings over growth ratio, which is 0.81. A reading below 1.0 is considered attractive, and NCR solidly stands ahead of competitor Diebold, Inc. (DBD), which has a reading of 1.3. While DBD has a stronger operating margin of 6.2% relative to 3.0% for NCR, DBD has been weak lately, failing to show any year-over-year quarterly revenue growth. Without some growth element, one must question the sustainability of such a strong margin. Furthermore, in terms of valuation, since DBD failed to be profitable last quarter, it carries a negative to price-to-earnings ratio; NCR is at 17.4, behind the industry average of 11, but with better growth prospects. Overall, the company appears to well positioned and is an attractive buy at these levels.
EMC, Corp. (EMC) – Coming off a recent estimate bump by several analysts, EMC is well positioned moving forward. The company competes with Hewlett-Packard (HPQ) and IBM (IBM), both of which are discussed below, and each offers a slightly different play on the hardware market. EMC is the well-rounded player in the group, offering a competitive blend of growth, value and efficient operation. With an operating margin of 17.1%, relative to 10.2% for HPQ and 20% for IBM, the company is strong, but does not lead the pack. On the growth side, however, EMC looks attractive; the company has a price-to-earnings over growth ratio of 0.9, relative to 0.7 for HPQ and 1.2 for IBM. A reading below 1.0 is considered attractive, so while HPQ is slightly more attractive, the specific issues that exist with that stock are discussed below. Overall, EMC is a great blend of important financial metrics and a perennial performer in the market. It represents a solid holding in any portfolio.
Canon, Inc. (CAJ) – One of the few remaining dominant players in the copying and printing space, competing with Xerox, Corp. (XRX), CAJ is a strong income play. With a dividend yield of 3.2%, relative to 2.4% for XRX, the stock current provides a better income element than U.S. treasuries and sits atop the industry as such. Also, with a market capitalization north of $50 billion, the stability offered by CAJ is impressive. In terms of pure financial metrics, XRX more attractive at current levels, with an operating margin of 8.3%, relative to 9.5% for CAJ, a price-to-earnings ratio of 10.7, relative to 18.8 for CAJ, and a price-to-earnings over growth ratio of 0.3, relative to 2.3 for CAJ. The slight edge in operating margin does not justify the large disparity in PEG ratios, so aside from the income element, XRX and CAJ may be better consider together as diversification plays on each other, rather than as requiring a one stock choice.
Hewlett-Packard – This stock is completely driven by news right now. Having run through management shakeups, massive product line jostling, and an apparent lack of direction, the market has abused this stock and left it at levels that make it a huge value – assuming that the iconic brand can manage to get it together. With an operating margin of 17.1% at EMC, relative to 10.2% for HPQ and 20% for IBM, the company lags its peers – not a shock given the recent turbulence. On the growth side, however, HPQ looks attractive; the company has a price-to-earnings over growth ratio of 0.7, relative to 0.9 for EMC and 1.2 for IBM. A reading below 1.0 is considered attractive, so while HPQ is slightly more attractive than EMC, one is left wondering about how much growth can be squeezed from a stone. If the company gets on track, current levels will have proven a great time to buy.
International Business Machines, Inc. – Standing as the blue blood in this group, IBM’s true value is in the efficiency of its operations. With an operating margin at 20%, the company continues to move forward, undaunted by the competition it encounters. One of the true blue chips names out there, IBM makes an attractive core holding for any portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.