PC Industry Presented by Daniel Cheung Kai Li
PC Industry Presented by Daniel Cheung, Kai Li Xiaotao Wang, Xiang Ren
The Players n Dell n HP / Compaq n Apple n Gateway / e. Machine n Others
Market Shares
PC Sales by Region
Industry Performance n NASDAQ Computer Index (IXCO)
Price Performance – 1 Year
Factors Affecting PC Industry n Profit margin and parts cost n Upgrading cycle n Overall economical condition n Oversea markets
Industry Trends n Decline in desktop sales n Increase in mobile computing due to increase in wireless connectivity (25% worldwide and 30% in US) n Shifting toward digital home theater n Maturing of PC market
Business Model n Direct sales - Just In Time model, low inventory, direct to customer by phone & internet, lower cost and price n Resellers - Retail stores such as Future Shop, require inventory, higher cost and price
PC Brands VS Whitebox n What is Whitebox? - no name brand PC assemble by independent shops - used by more advance customers who like to customize individual parts - usually have less services compared to branded PC n Reaction from PC giants? - Dell’s XPS series, try to target gamers
HP History § Founded in 1939 by William R. Hewlett and David Packard. § Incorporated in 1947 under the laws of the State of California. § Changed the state of incorporation from California to Delaware in 1998.
Business Segment Information § § § § The Personal Systems Group (PSG) The Imaging and Printing Group (IPG) Enterprise Storage and servers (ESS) HP Services (HPS) HP Financial Services (HPFS) Software Corporate Investments
Personal Systems Group § One of the leading vendors of personal computer in the world based on unit volume shipped annual revenue. § Provides commercial PCs, consumer PCs, workstations, handheld computing devices, digital entertainment systems, calculators and other related accessories.
Imaging and Printing Group § The leading imaging and printing systems provider in the world for printer hardware, printing supplies and scanning device. § IPG's products can be categorized as home and business printing, imaging and publishing devices and systems, digital imaging products and printer supplies.
Enterprise Storage and Servers § Business Critical Servers § Industry Standard Servers § Storage
HP Financial Services § supports and enhances HP's global product and service solutions. § provides a broad range of value-added financial life cycle management services. § Offers leasing, financing, utility programs and asset recovery services, and financial asset management services for large global and enterprises customer.
HP Services § Technology Services – provide product warranty support. § Consulting and Integration – help customers measure, assess and maintain the link between business and IT. – Align, extend and manage customer’s applications and business processes. § Managed Services – offer IT management services, such as client computing managed services and managed web service.
Software § Provides management software solution § delivers a suite of comprehensive, carrier-grade platforms for developing and deploying nextgeneration voice, data and converged services § Focus on extending network-management software into application and business process management.
Summary of Revenue
Revenue Composition
Business Strategic Imperatives § To provide customers with superior products, services and overall experiences by providing leadingedge technologies. § To deliver to business customers the best return on IT investments in the industry. § To build world class cost structures and processes across HP's entire portfolio of businesses. § To focus on innovation and research and development.
HP International
Production Distribution § Retailer - a party sell HP product to public through their own physical or internet store. § Resellers - a party sell HP product and service, frequently with their own value added product or service to targeted customer groups. § Distribution partners - a party supply HP solution to small reseller with whom HP don’t have direct relationship § Independent distributor - a party supply HP products into geographies or customer segments in which HP have a lesser presence. § Original-equipment-manufactures (OEM) - a party integrate HP products with their own hardware or software and sell the integrated products.
Competition § Personal Systems Group – Dell, Toshiba, Apple, and China-based Lenovo Group § Imaging and Printing Group – Lexmark, Xerox, Epson, Sony, and Canon § Enterprise Storage and Servers – IBM, EMC, Dell, and Sun Microsystems § HP Services – IBM Global services and EDS Corporation
Income Statement Analysis For the fiscal year ended October 31 2004 2003 2002 2001 2000 1999 Total net revenue $79, 905 $73, 061 $56, 588 $45, 226 $48, 870 $42, 371 Total costs of Op 75, 678 70, 165 57, 600 43, 787 44, 845 38, 553 Net earnings 3, 497 2, 539 (903) 408 3, 697 3, 491 Net earnings/share 1. 16 0. 83 (0. 36) 0. 21 1. 87 1. 73
Revenue Change over the year
Income Statement Analysis § Revenue increased constantly form 1999 to 2004 § Earning from operation drooped from 2000 to 2002, then starting to increase from 2002 to 2004 – the reason of negative earning from operation in 2002 is that HP bought Compaq. It invested lots of money on this project. § Net earning follows the same pattern as earning from operation
Cash Flow Statement Analysis
Balance Sheet Analysis 2004 Total asset 2003 2002 2001 2000 1999 76, 138 M 74, 716 M 70, 710 M 32, 584 M 34, 009 M 35, 297 M Total Liability 38, 574 M 36, 970 M 34, 448 M 18, 631 M 19, 800 M 17, 002 M Total equity 37, 564 M 37, 746 M 36, 262 M 13, 953 M 14, 209 M 18, 295 M 0. 093 Return on equity Price to book value equity 1. 62 Net market value of shares 61038. 6 4 M 0. 067 -0. 0249 0. 029 0. 26 0. 191 1. 85 1. 46 2. 85 4. 33 12. 49 69892. 2 0 M 52839. 2 0 M 39765. 3 6 M 61457. 1 7 M 228539. 45 M
Balance Sheet Analysis § The huge drop on Price to Book value equity from 1999 to 2000 is due to large dividend payoff at $15. 59/share. – The larger the dividend payoff, the larger the stock price drop, because dividend payoff reduce the value of the company. § The negative Return on Equity is due to large payment to buy the Compaq § The Asset, Liability, and Equity has been doubled from 1999 to 2004
Share Outstanding
Fundamental Information Valuation Ratio (base on Oct 31, 2005 Yahoo data) Hewlett-Packard Co. Industry: Sector: Diversified Technology Computer Systems Market Cap 80. 1 B 225. 2 B 4508. 4 B P/E 26. 73 20. 20 33. 12 Div. Yield % 1. 10 0. 96 2. 05 Price to Book Value 2. 15 4. 75 5. 56 Price to Free Cash Flow 46. 48 38. 50 33. 70
Value Driver § Imaging and Printing Group & HP Services – Contribute 96. 5% of earning from operations on 2004 § Economies of scale – Second largest Market Capital in industry (Diversified Computer Systems industry) § Brand Recognition -Provide high quality products -Reliable services -Leading innovator in imaging and printing technology
Value Driver
Value Driver (Economies of Scale) Diversified Computer Systems industry Symbol Market Cap International Business Machines Corp. IBM 128. 04 B Hewlett-Packard Co. HPQ 82. 48 B Sun Microsystems Inc. SUNW 12. 72 B Scientific Games Corp. SGMS 2. 67 B Rackable Systems Inc. RACK 337. 45 M
Security Valuation § To evaluate the HP stock, we use FCFE discounted cash flow model: P(0)=FCFE*(0)(1+g)/(k-g) § From previous financial statement we can calculate the FCFE as: – FCFE=Cash flow from operation - Capital expenditures - Preferred dividends - Debt principal repayments + Proceeds of new debt issues – Therefore, the FCFE*(0) on 2004 is $1. 6
Security Valuation § Some important data used for evaluating the HP stock – Beta of HP = 1. 91 – Riskless return rate =4. 55% (5 years Treasure bond) – Market expected return rate = 9. 5% (S&P 500) § To calculate K, we use CAPM. – k= 4. 55%+ 1. 91(9. 5%-4. 55%) =14% § To calculate the growth rate g, we use past 5 years average net income growth rate. – g= 0. 029
Security Valuation § Given: – Beta of HP = 1. 9, Riskless return rate =4. 55%, Market return rate = 9. 5%, k=14%, g= 0. 029, and FCFE*(0) = 1. 6 § P(0)=FCFE*(0)(1+g)/(k-g) – P(0)= 1. 6(1+0. 029)/(0. 14 -0. 029)=$14. 83
The Application of Fisher § The Sales Growth and Product Development – Sales constantly grow over the year – Leading product innovator § Management Efficiency – Effective Management – Experienced Executive Team
The Application of Fisher § Competition – the competition is high – the second largest market capital in US Diversified Computer Systems industry § Shareholder’s Benefit Dilution – the positive net income can support HP's future growth without sacrificing the current shareholder’s benefit § Current Stock Price – median price (high potential to grow)
Recommendation § Hold the HP stock – Economies of scale – Constantly quarterly dividends pay out and dividend yield is great than Diversified Computer Systems industry’s average. – High profitability of HP services and imaging and printing group
apple It just works
History Apple Computer, Inc. was incorporated in California, January 3, 1977 l One of the earliest company that make personal computers l
Product l l l l Macintosh line of desktop and laptop computer Related software, services, and networking solutions Portable digital music player Xserver and Xserve RAID storage products Professional software applications OS X operating system i. Tunes Music Store Support line
Business Strategy Digital Hub (i. Pod, PDA, Camera) l Expanded Distribution (Own store) l Education (Free machine for school) l Creative Professionals (Final cut…) l
Globalization
Mac $1, 799 - $2, 999 $1, 599 - $1, 999 $2, 399 - $3, 999 $1, 249 - $1, 649 $629 - $899
Professional Software $1, 499 $1, 299 $599
i. Pod $379 - $499 $249 - $299 $129 - $169
Sales by Product
He is the Guy CEO of Apple Since 1998 - The guy turned Apple around
Market Today
Stock Market
Stock Market (What happened before 1998)
Earnings (before 1998)
Free Cash Flow (before 1998) FCF 1996 1997 1998 $ 341 $101 $ 729 Cash Flow Statement: Operating, Financing, Investing (Time of burning money)
Stock Market (What happened between 1998 - 2000)
Earnings (1998 -2000)
Free Cash Flow (1998 -2000) FCF 1998 1999 2000 $ 729 $ 751 $ 719 Cash Flow Statement: Operating, Financing, Investing (Jobs start to saving Apple)
What is the Driver New i. Mac saved Apple
Stock Market What happened after 2000
2000 - the nightmare of PC Economical reason hurt PC industry l Apple stock dropped sharply l Jobs notes that PC making may not save Apple this time l
Earnings (2001 -today)
Free Cash Flow (2002 -2004) FCF 2002 2003 2004 $ -85 $ 125 $ 760 Cash Flow Statement: Operating, Financing, Investing (Jobs’ new idea of Saving Apple)
What is the Driver i. Pod and i. Tunes turned Apple around i. Pod introduced year 2001
Balance Sheet 2002 2003 2004 P-BE 1. 26 1. 70 4. 97 net Asset 5, 143, 882 7, 195, 855 25, 208, 993
Forecasting Driver today (i. Pod and i. Tunes) l Driver tomorrow (More related product) l Or is it… (Apple is changing) l
What make Mac a “Mac” Operating System (Mac OS X) l CPU (G 5 made by IBM) l
Mac or PC Apple moving to Intel
Buy or Sell By using the Free Cash Flow valuation model Rf Rm Beta k g FCFE 4. 55% 9. 50% 1. 51 12. 02 10. 2 1. 64 P 0 = $99. 3
Buy or Sell Growth was unreal l P/E is high l Almost the end of year. . . l
Fisher’s Theory l The Sales Growth and Product Development - Strong l Strong sale growth l Leading product innovator l Management Efficiency - Strong l Effective Management (Jobs’ team)
Fisher’s Theory l Competition - Strong in digital music player The competition is high l The best seller of portable music player l l Stock price - High
Current Situation Strong sale of 2005 last quarter
Recommendation It it not a good time to buy l If you bought it months ago you can hold until end of the year and then sell it before the Holiday l
DELL Inc. • Founded in 1984 by Michael Dell • Customer-focused Direct Business Model • Shares traded on NASDAQ, volume is 2. 4 Billion, current price is $31. 31 per share, code is DELL • Fiscal year ended in January 28 • Current president and CEO is Kevin B. Rollins
Industry Position • 55, 200 full-time employees • 7 manufacture facilities around the world, the newest and largest facility, the seventh overall is in North California • Industry Leader on Market Capitalization $74. 5 billion • The biggest PC maker in the world.
DELL Stock (NASDAQ)
DELL Stock DELL-Q Last Trade: Nov 01, 2005 16: 00 EST Last: US$ 29. 240 Net Change: US$ -2. 640 % Change: -8. 28% Open 29. 890 Bid 29. 230 High 30. 020 Ask 29. 230 Low 28. 810 EPS 1. 37 Volume 105, 361, 100 P/E 21. 30 52 -Week High 42. 570 Indicated 0. 00 52 -Week Low 30. 820 Annual Div. Yield 0. 00
Performance In Recent Five Year(2000 -2005)
Volume of Shares
Management of DELL Inc. • President and CEO: Kevin B. Rollins – – driving Global Growth, Achieving Product Leadership, enhancing the Customer Experience developing our Winning Culture • Chairman of the Board: Michael S. Dell – “No other technology company listens to customers, collaborates with partners, adds its own significant layer of innovation and delivers relevant technology more efficiently and effectively than Dell. ”
Business Model • Customer-focused direct business model – Unique way of selling technology and revolutionary customer experience • Five tenets of this model – – – Most Efficient Path to the Customer Single Point of Accountability Build-to-Order Low-Cost Leader Standards-Based Technology
Products and Services • Enterprise system (servers, networking stations) • Computer system (Desktops, laptops) and computer peripherals. • Storage products • Printing and imaging system • Software products related to their products • Financial and technical supporting services
Percentage of Revenue, by product line 2005 2004 2003 2002 2001 Desktops 50% 51% 53% 53% Notebooks 29% 27% 28% 29% Enterprise 21% 22% 20% 19% 18% Total 100% 100%
Area Revenue Comparison
Financial Statement Analysis • Using the three financial statements – Income statement – Balance sheet – Cash flow statement • The latest quarter statement
Income statement All Number in Miiliions Period Ended 2005 January 28 Change 2004 January 30 Change 2003 January 31 Total Revenue $49, 205 18. 73% $41, 444 17. 06% $35, 404 Cost of Revenue $40, 190 18. 58% $33, 892 16. 65% $29, 055 Gross Margin $9, 015 19. 37% $7, 552 18. 95% $6, 349 Gross Margin/Revenue 18. 32% 0. 54% 18. 22% 1. 61% 17. 93% Operating Expense $4, 761 18. 79% $4, 008 14. 35% $3, 505 Operating Income $4, 254 20. 03% $3, 544 24. 61% $2, 844 Net Income $3, 043 15. 05% $2, 645 24. 65% $2, 122
Price to Book Value of Equity
Price to Earnings
Revenue growth(in millions of dollar)
Cost Structure
Profit Margin
GAAP Net Income Growth Trend (in millions of dollars)
Balance Sheet Statement (Assets) Assets Current Assets Cash And Cash Equivalents 4, 747, 000 4, 317, 000 4, 232, 000 Short Term Investments 5, 060, 000 835, 000 406, 000 Net Receivables 4, 414, 000 3, 635, 000 2, 586, 000 459, 000 327, 000 306, 000 2, 217, 000 1, 519, 000 1, 394, 000 16, 897, 000 10, 633, 000 8, 924, 000 Long Term Investments 4, 319, 000 6, 770, 000 5, 267, 000 Property Plant and Equipment 1, 691, 000 1, 517, 000 913, 000 308, 000 391, 000 366, 000 23, 215, 000 19, 311, 000 15, 470, 000 Inventory Other Current Assets Total Current Assets Other Assets Total Assets
Cash Flow Statement(in thousands) Period Ending 28 -Jan-05 30 -Jan-04 31 -Jan-03 Net Income 3, 043, 000 2, 645, 000 2, 122, 000 334, 000 263, 000 211, 000 (275, 000) (383, 000) (217, 000) Operating Activities, Cash Flows Provided by or Used in Depreciation Adjustment To Net Income Changes In Accounts Receivables - (813, 000) 190, 000 Changes In Liabilities - 2, 150, 000 1, 429, 000 Changes In Inventories - (53, 000) (21, 000) Changes In Other Operating Activities 2, 208, 000 (139, 000) (176, 000) Total Cash Flow From Operating Activities 5, 310, 000 3, 670, 000 3, 538, 000
Cash Flow Statement (Continued) Investing Activities, Cash Flows Provided By or Used in Capital Expenditure Investment Other Cash flows from Investing Activities (525, 000) (329, 000) (305, 000) (1, 792, 000) (2, 021, 000) (1, 076, 000) (464, 000) Total Cash Flows from Investing Activities (2, 317, 000) (2, 814, 000) (1, 381, 000) Financing Activities, Cash Flows Provided By or Used in Dividend Paid - Sale Purchase of Stock Net Borrowings Total Cash Flows From Financing Activities - (3, 128, 000) - - (1, 383, 000) - (2, 025, 000) - (3, 128, 000) (1, 383, 000) (2, 025, 000) Effect of Exchange Rate Changes 565, 000 612, 000 459, 000 Change In Cash and Cash Equivalents 430, 000 85, 000 591, 000 4, 785, ooo 3, 341, 000 1, 817, 000 Free Cash Flow
Net Cash Increase
Quarterly Statement Ratios Prior 5 Quarter Results Q 2 -FY 06 Q 1 -FY 06 Q 4 -FY 05 Q 3 -FY 05 Q 2 -FY 05 Current ratio 1. 17 1. 19 1. 20 1. 11 1. 03 Quick ratio 1. 13 0. 98 1. 01 0. 91 0. 81 Cash conversion cycle (38) (39) (37) (34) (35) Days supply in inventory 5 4 4 Days of sales outstanding 1 33 32 32 33 31 Days in accounts payable 76 75 73 71 70 Cash flow (millions): Cash flow from operations $ 919 $ 1, 190 $ 1, 818 $ 1, 787 $ 703 Per share $ 0. 38 $ 0. 48 $ 0. 73 $ 0. 72 $ 0. 28 Net free cash flows 2 $ 609 $ 1, 011 $ 1, 569 $ 1, 609 $ 524 Cash and investments $ 12, 671 $ 13, 416 $ 14, 127 $ 12, 436 $ 11, 810 Shares repurchased (millions) 47 50 22 38 25
Quarterly Assets Statement Prior 5 Quarter Results Assets: Q 2 -FY 06 Q 1 -FY 06 Q 4 -FY 05 Q 3 -FY 05 Q 2 -FY 05 Cash & cash equivalents $ 6, 337 $ 5, 874 $ 4, 747 $ 4, 525 $ 4, 025 Short-term investments 2, 709 3, 967 5, 060 2, 969 1, 509 Accounts receivable, net 4, 443 4, 289 4, 414 4, 167 3, 625 Inventories 570 483 459 415 418 Other 2, 739 2, 439 2, 217 2, 124 2, 055 Total current assets 16, 798 17, 052 16, 897 14, 200 11, 632 PP&E, net 1, 843 1, 741 1, 691 1, 627 1, 578 Investments 3, 625 3, 574 4, 319 4, 942 6, 276 Other non-current assets 345 320 308 285 446 Total assets: 22, 611 22, 687 23, 215 21, 054 19, 932
Return on Equity
Return of Assets
Management Effectiveness • Dell has superior return of assets (ROA) and return of equity (ROE) compared with other competitors such like Apple, HP. • Higher ROA and ROA mean Dell are able to earn more profits by using less capitals. • High ROA and ROE attract more investors.
Value Driver of Stock Price • Growth of revenue – Growth of international market share – New Product Assemble Line – Reducing shipment cost • Cost-efficient innovation – Low investment on R&D but better on satisfying market demand • Growth of earnings – Earning from investing in the financial market
The Application of Fisher • Stable and fast Sales Growth and Product Development – Sales constantly grow over the year. Expected sales in 2006 is $60 billion US, and 2007 expected sales reach $80 billion. – Increasing market share. – More product lines, entering the home entertainment industry, such as LCD, plasma TV. • Management Performance – Effective and efficient Management, high ROE, ROA above the industry average. – Winning culture from beginning.
The Application of Fisher • Competition – PC industry competition is high – the largest market capital in PC industry, $70. 0 Billion – 7 manufacture factories all over the world (US, Europe, Asia, Japan)
Free-Cash-Flow-to-Equity Discount Model • Beta for DELL INC. =1. 43 • Rf = 4. 55% (Five-year US Treasury) • Expected yearly market return on S&P 500 Stock Index = 17. 40 % • Using CAPM: k = Rf + *(Rm - Rf ) = 22. 92 % • The retained earning growth rate, g, was estimated be average per year. • The FCFE model is given by: FCFE 0 (1+g)/(k - g) • The growth g = 0. 1894
Recommendation • The price of the Dell is $33. 60 below the current price = $29. 94. • BUY Now!!
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