Thoughts on Hewlett Packard and Dell

I basically commented this with with a fellow investor:

My problem with Hewlett Packard is that I see the cheapness and appreciate the current CEO but the last years had an earnings run up which I have my doubts is sustainable. The recent analyst meeting gave me a negative feeling. Sales and costs incentives were not aligned, it had bad effect on margins which is being addressed now but which is a sign of deficient operational practices. I have doubts about the quality of the company as a whole. It used to have a good reputation, Tim Cook from Apple worked there in the “old” days. Mark Hurd seemed like a fine CEO but got fired by the board due to a sex “scandal” and went to Oracle. Then they got several CEOs that literally drained the company with bad and expensive acquisitions. The last years have been chaotic and I have too many doubts about its recovery. They have too much debt for my taste and have some financial services that I fear about. They depend on large companies, printing, and consumer products too much. In large companies the competition with IBM, Orcale and Cisco is big. I can not see if printing will be a good business in 5 or 10 more years. Consumer PCs are under a heavy competition. Hewlett’s current CEO used to be Ebay’s Ceo, ironically Ebay is now using Dell’s systems.

On the other hand Dell also looks cheap but the key difference is that I trust it more as a management team and like it’s balance sheet. I like its operational efficiency, it’s customers, services and products. Dell is focused on small and medium companies. It is in a growing sector and offers products and services that scale very well along those clients. Also I like how it has evolved. I like its four main managers. The one from services is great, services are evolving excellently. On the other hand Hewlett is losing services contracts, even to Dell, (see last analyst meeting). The manager from client is quite bright too. The one from enterprise and networking really impressed me, very intelligent and calm, he has done a great job on blade servers. The one from software also made an impact on me, he just came from IBM and is a legend, he developed “websphere”, a star software product I have used personally. The integration of those four managers along with new acquisitions seem to be evolving smoothly and offer a holistic solution that makes a lot of sense to me.

One thing that plays in my favor with Dell is that their SEC fillings divide their customers in four global business segments which are Large Enterprise, Public, Small and Medium Business (“SMB”), and Consumer. It plays in my favor because it gives a very uninformative view of the company. So it keeps away competition from other investors. Another thing that favors to get cheap shares is the mania and fear due to the: iPads/Smartphones/Death of the PCs stories.

That “SEC” way to look at the company gives little information. It has helped me much more to look at it divided by functionality: 1) services 2) client 3) software and 4) enterprise and networking. It’s 4 main managers are divided as such as I wrote 2 paragraphs above. So if you take a Sec filling and read the management discussion you can easily get confused. But when you look at other sources, like investor presentations, analyst meetings, customer and product videos (lots on youtube) and conference calls you get a clearer picture. Specially for Dell, that work is necessary, due to the uninformative traditional segment division they still use on the Sec fillings. What I notice, specially by the questions the analysis make, is that several investors and analysts get confused when they focus only of the SEC fillings segments and don’t dig deeper, which in this case is necessary to get a realistic picture.

Cheers!
jrv

PD: I continue loading up on Dell.

Here is one video I liked. It talks about its customers and Wyse products. Wyse offers thin clients, very secure, very popular with Dell’s Banks customers recently (JP Morgan, Deutsche bank, Citigroup …), due to security reasons :

This video talks about blade servers, converged server solutions that solve storage, networking and security all in one:

Finally this shows the recent consumer and small business products, specially tailored for the enterprise due to their security features and windows base:

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About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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5 Responses to Thoughts on Hewlett Packard and Dell

  1. Anonymous says:

    As always, great article. I love your fundamental analysis.

  2. ASTA says:

    Hello jrv,

    Well as always you write and analyse very well jrv.
    Thanks to you and other sites I have been buying Dell.
    Doubled down at 9.36 to make Dell 9% of my portfolio.
    So lets hope you are right ;D
    And my contrarian instincts are good.

    Cheers,

    ASTA

  3. Anonymous says:

    I’ve read this. It seems HP deserves a bit more analysis.

    HPQ is the best buy. The company carried some 55 billion dolars of “Goodwill” + some 9 billion dollars of intangible assets.
    Until April 28, 2012 the company did not amortize those “Assets”.

    For the qurter ending july 31st, 2012, the company decided, suddenlly, to amortize thoses assets for 9 billion dollars. In addition to that they made o provision of 1.8 billion dollars for restructuring charges. This expains the huge loss per share for the last reported quarter.

    As of july 32, 2012, there where no more Intangible Assets and the amount of the goodwill is only 44 billion dollars.

    Based on the EPS for 2013 and 2014, the PER, based on the current price of $14.47 will be respectivelly 4 and 3. with a dividend yield of 3.7% and 4.4% for 2013

    • jrv says:

      Hewlett does look cheap. But I personally prefer to invest in companies that I consider to have superior quality. I do not specialize nor like much turn around situations.

      No matter how low the price and the valuation metrics look like I prefer to stay out from investing in a company with a recent history of multiple managers, disastrous acquisitions, employee reductions, asset write downs and major customer run offs. The positive thing is that the current situation is recognized by the current CEO. Even then I prefer not to put my money where I do not trust the future of the culture, the recent management and the core businesses, I have doubts that they can turn around printing and consumer PCs. Actually I have no faith in the future of printing.

      From the last analyst meeting I read that the services revenues are under pressure:

      “I just mentioned to you the assumptions around the significant top line and margin challenges in Enterprise Services, and again, Mike Nefkens and JJ Charhon will add additional color shortly, but overall, we’re seeing meaningful key large account runoffs, and that’s putting pressure on margins despite plans for significant cost reductions in that business.”

      Catherine A. Lesjak – Chief Financial Officer – Hewlett Packard

      I did not like that sales operations were not linked to costs as they should. That had some bad consequences on margins and is another sign of bad management.

      Another challenge HP faces is that the link between accountability and compensation was not what it needed to be. The direct line between what our executives are responsible for, the decisions they can make and how they need — and how they get paid needs to be a lot tighter than it is.

      Margaret C. Whitman – Chief Executive Officer, President and Director – Hewlett Packard

      While they spent their money on bad acquisitions they under invested in their core products:

      I’ve also found that HP has suffered from underinvestment in the lifeblood of technology companies: R&D and IT systems. We have some product gaps that we simply should not have. For example, it’s been over 7 years since we had a new lineup of Multifunction Printers. We do now for late 2012 and 2013, but we have a much smaller share than we should in this very fast-growing market, that, by the way, drives a lot of supplies purchasing.
      …….
      I believe we’re going to continue to also see broad-based — a broad-based profit decline across most businesses in 2013 as each BU fights to accelerate the new offerings that will win in the marketplace, get their costs under control and improve operations.

      Margaret C. Whitman – Chief Executive Officer, President and Director – Hewlett Packard

      It looks to me like that the problems are not only due to asset write-downs, which are by themselves a big problem anyways and a sign of bad decisions.

      I do not take the dividend for granted nor would base my investment decision on it. I for sure do not think that the recent record earnings level can be sustained. The current PER can be very misleading if E falls, what looks cheap might not be the case.

      The goodwill of “only” 44 billions that you mention seems huge compared with the sales level, market capitalization and earnings power. I would not discard the possibility of meaningful impairments to it.

      That said I recognize that some people specialize in investing in these kind of situations. Some might do well here, and I hope it’s your case, but since I seriously doubt it I prefer to pass on this one.

      Best wishes!
      jrv

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