I got a chance to catch up with old colleagues at a tech investment conference this past week. And one topic dominated our hour-long discussion: Now that Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) are trading far from their all-time highs, is either one a bargain? More specifically, how do these two stocks stack up against each other? We couldn't come to an agreement, but now that I've had a chance to compare these two stocks, I think a clear winner has emerged.
To value these stocks, I used eight distinct factors and assigned each factor a relative weighting on a 100-point total scale. Here's the result:
Factor #1: profit margins
Weighting 15 points
Dell's operating margins have fluctuated between 4% and 8% in the past six years, while HP's margins have hovered between 7% and 9%, thanks to a greater emphasis on software and services.
Dell: 6.5 points
HP: 8.5 points
Factor #2: sales consistency
Weighting 12 points
In a worst case scenario (which we saw in 2009), Dell's sales fell 13%, while HP's fell only 3%. Moreover, Dell was only able to boost sales by 1% in fiscal (January) 2011 to about $61.5 billion, even after incorporating a series of acquisitions. HP's recent sales growth hasn't been especially impressive either, but the company at least has a higher degree of recurring revenue from long-term service contracts.
Dell: 5 points
HP: 7 points
Factor # 3: free cash flow
Weighting: 15 points
This is distinct from factor #1 because it better incorporates capital intensity. The company that can derive more profits with less capital spending can more quickly strengthen its financial position. Dell has a generated an average of $3.5 billion in free cash flow in the past four years, equating to a free cash flow yield of more than 25%, which is truly stunning. HP has generated an average of $8.5 billion in free cash flow in each of the past four years, equating to a still impressive 15% free cash flow yield.
Dell: 8.5 points
HP: 6.5 points
Open Letter to Obama and Congress From Internet Giants Calls For Reining In Government Surveillance | Nick Sorrentino
(An important interview) Saving the Net from the surveillance state (And Crony Media): Glenn Greenwald speaks up (Q&A) | Nick Sorrentino