Fund managers: Don't give up on HP, Dell or PCs

By Mark Jewell
AP Personal Finance Writer

BOSTON (AP) — All the buzz about mobile devices might lead you to believe the PC’s future is bleak.

Just this week, Apple unveiled the iPad Mini, barely a month after the iPhone 5 rollout. Even Microsoft, a driving force in the rise of desktop PCs, is ramping up its mobile game. It’s launching its first tablet, the Surface.

Indeed, one research firm projects that PC shipments are likely to post an annual decline this year for the first time since 2001. That outlook is reflected in the trouble of two PC pioneers. Shares of Hewlett-Packard Co. are down 45 percent this year, and Dell Inc. has fallen 37 percent.

HP’s stock is at its lowest level since 2002, when the bubble in Internet stock prices popped. Dell hasn’t been this low since early 2009, when the market bottomed out following the financial crisis.

It’s bad news for investors in mutual funds that count HP or Dell among their biggest stock holdings. Some fund managers have been explaining to their investors how the stocks have hurt performance in a year when the Standard & Poor’s 500 is up 12 percent.

Here’s a line from the latest shareholder letter from the Weitz Research Fund, where Dell was recently the ninth-largest holding and HP its tenth: “One commentator summed it up well when he said, ‘PCs are probably the most hated sector in the entire market.’”

Despite recent disappointing performance, the fund is holding onto Dell and HP and suggesting investors be patient. Weitz Research (WRESX) has trailed 99 percent of its large-growth stock peers this year.

Weitz Research co-manager Barton Hooper sees strong potential in these stocks, priced at a discount. Although he concedes that the days of rapid growth for PC makers are over, he notes that once-dominant technologies don’t disappear quickly.

“Remember, we still have mainframe computers,” Hooper says. “PCs are not going to disappear.”

Here’s an outlook on HP from Hooper, and a look at Dell from two fund managers who own that stock:

HP: SLOW TURNAROUND
This Silicon Valley icon is trying to recover from years of miscalculations and management turmoil. Dozens of acquisitions dating to mid-2007 have largely turned out to be duds, and HP recorded its biggest quarterly loss ever in this year’s second quarter.

Then there’s the revolving door to the CEO office. Two chief executives were removed in two years, leading to last year’s appointment of former eBay chief Meg Whitman.

HP is also scrambling to catch up in cloud computing, the distribution of software applications over the Internet from remote data centers.

HP still has the world’s biggest printing and ink business, but that’s not a promising area as on-the-go computing becomes more common. And HP’s share in PCs is shrinking. The research firm Gartner estimated this month that China’s Lenovo Group outsold HP in the third quarter for the first time, although another researcher,
IDC, still ranks HP first.

Hooper believes HP can begin posting earnings growth as soon as 2014 if it can succeed on two fronts. First, HP must show progress in restoring its enterprise services business for corporate customers. HP has acknowledged neglecting that business after its 2008 acquisition of services company Electronic Data Systems.
Second, HP must generate profit growth from printers and ink by controlling expenses in a business segment that Hooper says has been run inefficiently.

The printing group was combined this year with HP’s PC operations in a move to streamline the company.

The PC business “is doing as well as its can,” Hooper says. “When that discipline is applied to printing, where HP has much better market share, we should see results improve for the company overall.”

Another reason to like HP stock at its current low price of about $14 per share is its quarterly dividend of 13.2 cents. That’s a dividend yield of 3.7 percent, an attractive return during these times of puny interest rates.

DELL: DIVERSIFYING BEYOND THE PC
The Texas company made its name selling PCs. But profit margins in the consumer PC business have been shrinking for years. Meanwhile, Dell has been pressured by the popularity of tablets and smartphones, and the reluctance of many companies to buy new workplace PCs amid a slow economic recovery.

As a result, Dell has been moving beyond PCs with recent acquisitions to expand in cloud computing, data storage and technology consulting. Those moves may not pay off for years.

Greg Estes, lead manager of the Intrepid All Cap Fund (ICMCX), believes investors are ignoring the No. 3 global position in PC sales of a company that generated $61 billion in revenue last year.

“The bottom line is Dell still sells lots of laptops and desktops,” Estes says. “And when I go into any office, guess what’s on the desk? It’s not an iPad, it’s a desktop.”
Brian Frank, of the Frank Value Fund (FRNKX), notes that Dell generates less than 5 percent of its operating income from consumer PC sales. Computer sales and services to businesses and governments generate far bigger profits for Dell, and the company’s recent acquisitions will improve its standing with those clients, Frank says.

Another appeal? The company paid its first-ever quarterly dividend this month, 8 cents a share. With the stock trading at around $9.25 per share, the yield is a sizable 3.5 percent.

Frank believes the current stock price assumes the PC business is in terminal decline.

“I don’t think the PC business is going away anytime soon,” he says. “The consumer PC side is definitely under pressure, but there is still a place for the PC in the workplace.”