Computer Hardware, Security & Recycling: 3 Companies To Watch Closely

Includes: CA, HPQ, ORCL
by: Cris Frangold

With internet commerce surpassing $200 billion just in America this year, and so many businesses having stored customer credit cards and other sensitive information on their networks, IT security has become an important consideration for all tech companies. In particular, the risk of fraud is substantial when unprocessed equipment is simply deposited in a landfill. In this article, I will look at companies whose business is, in whole or part, the secure destruction and/or recycling of computer hardware.

Oracle (NYSE:ORCL) is a leading business to business database and middleware developer and seller, and through its 2010 acquisition of Sun Microsystems, a maker and seller of mainframe systems and supplier of end user applications systems such as Java and Open Office. After breakneck growth over the past five years (revenues averaged 19% annual growth), the company seems to be settling in as a slower growing, albeit more predictable, global tech behemoth.

In its first quarter of its fiscal 2013, which ended August 31, 2012, Oracle reported non GAAP profits of $2.6 billion, or $0.53 per share. This was 10% above the $2.4 billion, or $0.48 per share for the same period in fiscal 2012, and also precisely matched analysts' expectations for the quarter. Revenues, on the other hand, fell to $8.2 billion from $8.4 billion, led lower by a 24% drop in computer hardware sales -- the division acquired in the Sun Microsystems deal.

Despite the Sun purchase, Oracle has known for some time that much of its future is in cloud-based applications and storage. Oracle's ubiquity in installed applications around the world all but guarantees its future as a leading consulting and servicing organization. Oracle also has promise in its Exa products, which sold about $1 billion in product in fiscal 2012, and may well double that number in fiscal 2013.

Oracle's hardware disposal and recycling product stemmed from its goal of being a turnkey supplier. It is a complicated business, with a vast array of different standards among the 50 states and the many countries in which Oracle does business. The division affords Oracle the opportunity to call itself a "green business" -- an attractive feature in this day and age. Oracle's ability to deal with data destruction and computer hardware recycling allows the entire industry to better deal with fraud risk, thus giving investors an opportunity to see Oracle as a more valuable company and raising investor sentiment overall, which could positively impact its stock. With the company's newfound profit predictability, I believe Oracle is a suitable choice for most risk-averse investors.

CA Technologies (NASDAQ:CA), the former Computer Associates, is also among my favorite tech companies. This company specializes in business software in both mainframe and distributed systems. CA's fiscal first quarter, ending June 30, 2012, was not the best. Non-GAAP earnings increased about six percent from the same quarter of fiscal 2012, to $297 million. Per share was up 15%, to $0.63 per share. But supporting numbers were nearly uniformly negative. Revenue fell by two percent, backlog fell by five percent, and there was a substantially shorter period of its average booking, to 2.79 years, down from 3.28 years in the same period in 2012.

But as mentioned, I am optimistic about CA's future. It has a nearly 4% yield to provide support, it has a clean balance sheet, with debt of just 19% of capitalization, and its product offerings are going to be in demand as the economy recovers. CA also has a sophisticated IT security division, covering both traditional land-based and cloud-based systems. As more companies begin to rely on cloud computing, and security becomes more of an issue, CA will be in a good position to capitalize on this increasingly lucrative segment of its business. Additionally, due to a partnership with Cytrix (NASDAQ:CTXS), CA's cloud presence is likely to increase at a rapid rate going forward. It is fairly valued at this time, with a PEG of 0.96.

Hewlett-Packard's (NYSE:HPQ) business has been something of a disaster in recent years -- a failure I lay squarely at the feet of the company's board. Due to an over $9 billion dollar write off of goodwill, along with additional write downs and restructuring costs, Hewlett Packard posted a GAAP loss of $8.86 billion, or $4.49 per share in quarter ending June 30th. Non-GAAP adjusted earnings came in at $2 billion, or $1.00 per share. The net was 14%, and per share was 9%, below year-ago figures.

Current management seems to be asking the investing public for a free pass until 2016 for signs of a turnaround, after which we should expect revenues to advance at the pace of overall gross domestic product. That is nonsense. As I write this, there is about $30 billion in market capitalization at risk, and while that is less than half what was outstanding this spring, that is not an amount that can be discounted by a "give us more time" excuse. I don't know for certain what the answer is. Suggestions have been made that Hewlett Packard should jettison its personal computer business. But when a business is struggling like it is, and with there already having been a succession of CEOs in the past few years, deeper changes are probably necessary. Obviously, I do not encourage anyone to invest in this company, except for perhaps short sellers.

Hewlett-Packard does place an emphasis on the refurbishment and reusing of its personal computers, printers, and supplies, which it offers at little to no cost. Companies that place an emphasis on going green are seen in a more positive light, and I believe this could help Hewlett-Packard's share value in the long term.

Refurbishing and reusing old computers and associated hardware properly also reduces fraud risk. Fraud risk, data destruction, and the recycling of computer hardware and related parts is a huge deal for the companies discussed above. Yet, according to the International Data Corporation, it still remains an orphaned function for most of these companies. At the same time, recycling e-waste is becoming an attractive business opportunity for companies like Oracle, CA Technologies, and Hewlett-Packard. The Consumer Electronics Association has stated that global spending on electronics will soar above $1 trillion in 2012, as consumers are more frequently upgrading their electronics.

As opposed to these companies having divisions devoted to the secure disposition and recycling of hardware, privately held Secure It Recycling is focused on the process. This London, England-based company specializes in expired hardware owned by institutions such as schools and universities, banks and large corporations. The company handles on- and off-site services in the areas of computer recycling, data destruction, laptop recycling, monitor recycling, printer recycling, server recycling, and weee recycling. One advantage it has over the other companies in this report is that it covers all of Great Britain. Therefore, it deals with just one jurisdiction with one set of standards. While most cities in this country have computer stores that will recycle used equipment, it would be nice to see a company the size of Secure It Recycling doing business across state lines to help enforce some uniformity across the patchwork that now exists in the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.