Rumors of the personal computer's death have been greatly exaggerated.
If you believe the hype, the smart phone has killed the personal computer. Smart phone platforms like Apple's (AAPL) iPhone and Google's (GOOG) Android systems are super-hot, and PCs are yesterday's news. If you follow this logic, big players in the PC market like Hewlett Packard (HPQ), Microsoft (MSFT), Intel (INTC) and Dell (DELL) will be destroyed as the PC market collapses.
Don't believe the hype.
Windows remains the dominant OS and PCs which run Windows are cheaper than Macintosh computers. Moreover, there are many Windows users and programmers who will cling to their PCs to avoid the pain of learning new systems and having to alter their programs. Moreover, Microsoft has a reputation of providing backwards compatibility and an open platform, which is in contrast to Apple which screens apps before making them available on the iPhone and has a history of extinct platforms. (Do you remember the Apple II, the Apple Lisa or the Apple Newton?)
Clearly, the death of the PC is not a foregone conclusion and a lack of interest in PC companies might have contributed to their attractive valuations. DELL, HPQ, INTC, and MSFT all trade at lower price-to-earnings ratios and price-to-sales ratios than AAPL and GOOG.
Ticker | Company | P/E | P/S | Div Yield |
DELL | Dell Inc. | 9.35 | 0.51 | |
HPQ | Hewlett-Packard Company | 9.25 | 0.41 | 1.8% |
INTC | Intel Corporation | 11.35 | 2.52 | 3.1% |
MSFT | Microsoft Corporation | 11.55 | 3.71 | 2.5% |
AAPL | Apple Inc. | 15.25 | 3.9 | |
GOOG | Google Inc. | 20.79 | 5.3 |
(Price-to-book ratios are not provided for comparison because they are not as useful for companies with significant internal research and development costs. A firm which buys technology developed outside the firm would have a lower price-to-book company than an identical firm that produces the technology internally.)
Clearly, the price multiples of DELL, HPQ, MSFT and INTC are low enough to attract attention from value investors. Do these low prices merely indicate that they are value traps, or are these quality firms?
The quality of these stocks can be assayed by confirming long-term positive equity returns and financial stability that can come through tough economic conditions. Fortunately, these firms have positive average equity returns over the past 10 reported fiscal years and most have "safe" Altman Z-scores:
Ticker | 10-Year Average ROE | Altman Z-score |
DELL | 48.7% | 3.53 |
HPQ | 13.2% | 1.94 |
INTC | 14.9% | 5.73 |
MSFT | 30.6% | 5.30 |
AAPL | 21.0% | 9.06 |
GOOG | 26.6% | 10.89 |
With the exception of HPQ, all these stocks are categorized as "safe" according to the Altman Z-score, indicating that they are not considered bankruptcy risks.* HPQ scores in the "gray zone" area according to the Altman Z-score.
Based on lower price multiples, these PC-era stocks are cheaper than AAPL and GOOG at current market price multiples. The personal computer is not dead yet, and the Windows ecosystem is not facing mass extinctions. Value investors should consider DELL, INTC and MSFT as additions to their portfolios.
*Please read the article disclaimer for this article and Altman z-score calculations.
Disclosure: I am long AAPL.
