Value Investing With Apple's Competitors

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 |  Includes: AAPL, BBRY, DELL, HPQ, NOK, QSFT
by: Stock Croc

There are many vanquished firms like Research In Motion (RIMM), Dell (DELL), Nokia (NOK) and Hewlett-Packard (HPQ) that have been disrupted by Apple's (AAPL) foray into mobile devices. Apple calls the shots, and its competitors are currently forced to play by its rules. Has Apple completely crushed its competition? Are these competitors worth investing in? Let's find out.

Struggling Competition

Research In Motion has decided to sell its nine-passenger midrange company plane as part of a plan to eliminate $1 billion from business costs. The company hopes to sell the plane for six or seven million dollars. This sale is part of an effort to cut down the operating budget as BlackBerries become less popular and lose sales. Last year, sales in the US dropped by 47%, causing Research In Motion to put more of an emphasis on generating sales in other markets, including Indonesia and South Africa. The company is also letting go of a third of its employees, and closing down several production sites.

Firms in the PC industry are also scrambling to redefine themselves as PC sales stagnate. Dell's interest in Quest Software (QSFT) demonstrates that the firm is looking to bolster its database and server businesses. The most recent offer for Quest was $27.50 per share, and is conjectured to come from Dell by industry analysts.

Hewlett-Packard has also been under alot of pressure, and turnarounds like this are herculean efforts. Meg Whitman compared her mission as Hewlett-Packard's CEO to Larry Schultz's revitalization of Starbucks, which began in 2008 when he re-assumed control as CEO. Whitman warns that getting back on track is a long process which could take as long as five years. It will be painful, too. As part of a restructuring it announced in May, Hewlett-Packard expects to lay-off 8,000 European positions. Related downsizing could impact workforces in the Middle East and Africa.

Fortunately, Whitman has asserted that she will not pursue enormous acquisitions. Instead, Hewlett-Packard has chosen to appeal to the tablet market, based on productivity rather than media usage, with its new Intel x86 processor. Instead of utilizing the ARM processor based Windows 8 RT tablets, HP has elected to use Windows 8 Pro. Windows 8 Pro makes Intel x86 more powerful and backwards compatible to many Windows programs, including MS Office. Because of its focus on productivity, HP expects this tablet to compete with laptops rather than tablets used for purely recreational pursuits such as the iPad. This new tablet follows the HP TouchPad, HP's first foray into the tablet market that flopped because of serious performance issues.

Seeking Appropriate Valuations

Since many of these firms are essentially chum in the wake of the Apple shark, investors should demand very attractive, bargain basement valuations for these firms. Consider the following:

Ticker

Company

P/E

P/S

P/FCF

AAPL

Apple

14.97

4.03

12.87

DELL

Dell

7.01

0.35

5.06

HPQ

Hewlett-Packard

7.53

0.31

10.04

RIMM

Research In Motion

N/A

0.25

N/A

NOK

Nokia

N/A

0.16

N/A

Click to enlarge

The displaced device makers Nokia and Research In Motion are trading at dramatically lower price-to-sales multiples than personal computer companies Dell and Hewlett-Packard, which are trading at dramatically lower price-to-sales multiples than Apple.

Dell is a particularly interesting value candidate in this list. It has very attractive price-to-earnings, price-to-free cash flow, and price-to-sales ratios. Moreover, as a retailer it can benefit from technologies which are not unique to Apple being sold through its distribution channels. The other firms are still attractive, but less-so than Dell. Since the future is impossible to predict, value investors should consider very small investments across each of these firms to hedge their bets, some of which may go bankrupt or dissolve as markets for their products die out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.