Is There Still Value In Big Computing?

Submitted by Morgan Smith as part of our contributors program.

With the wide variety of computing devices that are available today, some of the early industry giants tend to sometimes get lost in the commotion. Yet, for investors who are seeking good solid dividend yield, as well as the potential for growth, some of these shares are worth taking a second look at. In this article, I will discuss why I feel that Hewlett-Packard (HPQ) and IBM (IBM) could hold real value for their shareholders.

Hewlett-Packard actually began underperforming the S&P back in early 2010, and it has continued to show fairly disappointing news since that time. Yet, for bargain hunters, this may be a real diamond in the rough.

Even with a few recent setbacks, Hewlett-Packard shares continue to move forward. Recently, Sam Greenblatt, the former CTO of HP’s webOS business unit who left his job there in March 2012, has joined Dell as the company’s “chief technical evangelist” in its Enterprise Solutions Group.

After announcing its second quarter 2012 earnings, HP shares dropped again, making the company an even better value for those who are seeking a high dividend yield along with the potential to ride the share price back up – and those investors may have that chance soon.

HP shares are currently rewarding investors with a dividend yield of 3.60%. Although Hewlett-Packard’s earnings per share are in negative territory – leading to the shares recently being downgraded by Argus – the company’s share price is expected to increase by more than 30% over the next twelve months, providing a substantial amount of potential growth and income.

IBM has been moving along nicely as well. The company’s earnings were recently in line with analysts’ expectations for third quarter 2012, even though sales came in a bit low and affecting revenue. As compared to the year prior, Big Blue’s revenue fell slightly, yet earnings per share were up.

Other positive factors in IBM’s favor include the company’s sale of its retail point-of-sales systems to Toshiba in mid-2012. Although this division was profitable for IBM, it did lag behind the firm’s overall operating margins of approximately 20%. So in essence, Big Blue swapped an $850 million pre-tax sale price for its point-of-sale systems in return for better margins in the hardware area.

There are several potential drivers of growth for IBM going forward. First, the currency-adjusted sales to the BRIC block rose by 11% in the third quarter 2012 versus one year prior. The company’s Smarter Planet project is also beginning to see some profits. The products from this project contain embedded intelligent systems that allow interconnectedness between new “smarter” products with IT systems that are able to deliver differentiated business services and create new opportunities for connecting people and things worldwide.

Big Blue’s third quarter 2012 numbers reported revenue of $24.75 billion, with gross margin standing at just over 47% – which is 90 basis points better the prior year’s quarter. And, although IBMs third quarter 2012 operating margin was lower than analysts’ expectations, net margin was higher. Analysts estimate fourth quarter 2012 revenue at just under $30 billion, and the revenue estimate for 2013 is slightly above $105 billion, with an estimated 2013 earnings per share of $15.15.

IBMs shares have continued to reward investors with a dividend yield of 1.60%. With earnings per share of nearly 14 and a P/E of just over 14, the prospects for IBM remain positive. Share price is estimated to increase by over 13% over the next twelve months.

The Growing Demand for Data, Its Components, and Its Proper Disposal

While keeping up with technology can be a full-time endeavor, disposing of its necessary components can also be an arduous task. Many forms of computer related equipment are classified as hazardous waste, and must be either recycled or disposed of in both the proper, and legal manner. This includes not only computer hard drives and memory sticks, but also CDs, tapes, and videos. One company that is taking this “wasteful” concept into profitable territory is Secure It Recycling, based in London, England. This company specializes in the collection and disposal of computer equipment throughout the United Kingdom. Secure It Recycling is also making inroads by offering their services both on and off-site for its clients, making it convenient for large and small businesses to stay focused on their everyday operations, while at the same time ensuring that they are complying with the rules and regulations as they relate to destruction of their data components. Secure It Recycling offers services in computer recycling, data destruction, laptop recycling, server recycling, montior recycling and much more. As more companies get into the spirit of “going green,” companies like Secure It will continue to find success, along with offering rewards for shareholders as well.

The Bottom Line

With all of the hype that seems to come along with newer and bigger and better technology, it is easy to see how some of the old pioneers like IBM and Hewlett-Packard can get technically lost in the shuffle.

Yet, I believe that there are numerous reasons why the shares of both IBM and Hewlett-Packard can provide investors with growth and income in their portfolios. Both companies – especially HP – appear to be sitting in a great position for investors to pick up some highly undervalued shares that have double digit 12-month growth estimates.

In addition, I feel that IBM seems to be on a positive path for several other reasons as well. Although the company’s numbers didn’t all match or exceed analyst’s estimates for mid-2012, the prospects for late 2012, as well as for the whole of 2013, look extremely promising. With its solid dividend yield as well as share growth estimates of 13% over the next year, shares of Big Blue could prove to be quite rewarding.