Today’s hot investment trend is … personal computer?
Late on thursday, both
Himachal Pradesh Inc.
(Ticker: HPQ) and
(DELL) expects better July-quarter results, part of strong consumer and education PC demand. Parents, students and teachers have accelerated the purchase of Chromebooks and low-end Windows notebooks as the school year begins. Many schools are studded with remote classrooms amid the recent ongoing Kovid-19 epidemic. There are widespread reports of notebook shortages, a problem Dell says is due to a tight supply of displays and microprocessors.
Advanced Micro Devices,
All are trading higher.
No question, both companies had strong quarters. HP beat the consensus revenue estimate by $ 1 billion, and sold more PC units than any quarter in its history. Dell’s profits, $ 1.92 per share, beat Street estimates by more than 50 cents, mainly due to effective cost reductions.
But both companies have deep operational challenges. HP’s printing business is struggling badly. The latest quarter saw a 20% drop in total printing revenue, and the supply business, which was not so long ago, was Street’s biggest concern about HP, down 19%. Dell says October quarter sales will remain below the seasonal average due to the continued impact of the recession; The company is feeling the impact of weakness in the small and medium-sized business segment.
Running two shares on Friday has more to do with capital allocation than a short-jump in PC demand or enterprise technology spending accents.
For Dell, the primary stock driver is the majority of the company’s proposed stake
(VMW) – The current value of the holding is higher than Dell’s current market cap. RBC Capital analyst Robert Muller boosted his rating on Outperform’s stock by sector performance, with a new target of $ 80 from a $ 48 target on Friday. But their call has nothing to do with the PC.
“With VMware spin on the table, we see a clear path from which Dell can unlock the value of its stake,” Muller wrote in a research note. “In addition, we believe Dell’s balance sheet of continuous improvement is positioned to withstand additional Kovid-19 (or other) macro shocks, and we believe in Dell’s ability to deliver on its long-term objectives, including obtaining investment grade ratings Is enhanced. ”
Muller notes that at current prices, a distribution of VMware shares to Dell holders would be worth $ 62 – and he notes that the value would be a portion of $ 80 over RBC’s target price for VMware at $ 180. In short, they say, with a VMware spin, Dell holders get the rest of the company for free.
For HP, the heart of the story is the company’s aggressive stock repurchase program. The company bought the stock for close to $ 1 billion this quarter, reducing the share count by about 4%. And the company hopes to continue to buy stock at a rate of $ 1 billion per quarter in the coming quarters. The company has $ 14 billion remaining on its stock repurchase program, equivalent to about half the current market cap.
Evercore ISI analyst Amit Daryani says there is scope to debate whether the strength HP has demonstrated in the July quarter is sustainable. He adds that “if HP management is willing to buy back $ 1 billion worth of stock every quarter” – an 18% float on an annual basis – “it’s a name that will likely continue to operate higher.” He repeats his Outperform rating, and increases his target from $ 21 to $ 22.
Write Eric J. at [email protected] Savitz