PC Industry

1
PC Industry

• Presented by
• Daniel Cheung, Kai Li
• Xiaotao Wang, Xiang Ren

2
The Players

• Dell
• HP / Compaq
• Apple
• Gateway / eMachine
• Others

3
Market Shares
4
PC Sales by Region
5
Industry Performance

• NASDAQ Computer Index (IXCO)

6
Price Performance 1 Year
7
Factors Affecting PC Industry

• Profit margin and parts cost
• Upgrading cycle
• Overall economical condition
• Oversea markets

8
Industry Trends

• Decline in desktop sales
• Increase in mobile computing due to increase in
  wireless connectivity (25 worldwide and 30 in
  US)
• Shifting toward digital home theater
• Maturing of PC market

9
Business Model

• Direct sales
• - Just In Time model, low inventory, direct to
  customer by phone internet, lower cost and
  price
• Resellers
• - Retail stores such as Future Shop, require
  inventory, higher cost and price

10
PC Brands VS Whitebox

• 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
• Reaction from PC giants?
• - Dells XPS series, try to target gamers

11
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12
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.

13
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

14
Personal Systems Group

• One of the leading vendors of personal computer
  in the world based on unit volume shipped and
  annual revenue.
• Provides commercial PCs, consumer PCs,
  workstations, handheld computing devices, digital
  entertainment systems, calculators and other
  related accessories.

15
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.

16
Enterprise Storage and Servers

• Business Critical Servers
• Industry Standard Servers
• Storage

17
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.

18
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 customers applications
  and business processes.
• Managed Services
• offer IT management services, such as client
  computing managed services and managed web
  service.

19
Software

• Provides management software solution
• delivers a suite of comprehensive, carrier-grade
  platforms for developing and deploying
  next-generation voice, data and converged
  services
• Focus on extending network-management software
  into application and business process management.

20
Summary of Revenue
21
Revenue Composition
22
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.

23
HP International
24
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 dont 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.

25
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

26
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
  

27
Revenue Change over the year
28
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

29
Cash Flow Statement Analysis
30
Balance Sheet Analysis
31
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

32
Share Outstanding
33
Fundamental Information
Valuation Ratio (base on Oct 31, 2005 Yahoo data) Hewlett-Packard Co. Industry Diversified Computer Systems Sector Technology
MarketCap 80.1B 225.2B 4508.4B
P/E 26.73 20.20 33.12
Div. Yield 1.10 0.96 2.05
Price toBook Value 2.15 4.75 5.56
Price toFree Cash Flow 46.48 38.50 33.70
34
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

35
Value Driver
36
Value Driver(Economies of Scale)
Diversified Computer Systems industry Symbol Market Cap
International Business Machines Corp. IBM 128.04B
Hewlett-Packard Co. HPQ 82.48B
Sun Microsystems Inc. SUNW 12.72B
Scientific Games Corp. SGMS 2.67B
Rackable Systems Inc. RACK 337.45M
37
Security Valuation

• To evaluate the HP stock, we use FCFE discounted
  cash flow model
• P(0)FCFE(0)(1g)/(k-g)
• From previous financial statement we can
  calculate the FCFE as
• FCFECash flow from operation - Capital
  expenditures - Preferred
  dividends - Debt principal repayments
  Proceeds of new debt issues
• Therefore, the FCFE(0) on 2004 is 1.6

38
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 (SP 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

39
Security Valuation

• Given
• Beta of HP 1.9,Riskless return rate 4.55,
  Market return rate 9.5, k14, g 0.029, and
  FCFE(0) 1.6
• P(0)FCFE(0)(1g)/(k-g)
• P(0) 1.6(10.029)/(0.14-0.029)14.83

40
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

41
The Application of Fisher

• Competition
• the competition is high
• the second largest market capital in US
  Diversified Computer Systems industry
• Shareholders Benefit Dilution
• the positive net income can support HP's future
  growth without sacrificing the current
  shareholders benefit
• Current Stock Price
• median price (high potential to grow)

42
Recommendation

• Hold the HP stock
• Economies of scale
• Constantly quarterly dividends pay out and
  dividend yield is great than Diversified Computer
  Systems industrys average.
• High profitability of HP services and imaging and
  printing group

43
apple

• It just works

44
History

• Apple Computer, Inc. was incorporated in
  California, January 3, 1977
• One of the earliest company that make personal
  computers

45
Product

• Macintosh line of desktop and laptop computer
• Related software, services, and networking
  solutions
• Portable digital music player
• Xserve server and Xserve RAID storage products
• Professional software applications
• OS X operating system
• iTunes Music Store
• Support line

46
Business Strategy

• Digital Hub (iPod, PDA, Camera)
• Expanded Distribution (Own store)
• Education (Free machine for school)
• Creative Professionals (Final cut)

47
Globalization
48
Mac
1,799 - 2,999
1,599 - 1,999
2,399 - 3,999
1,249 - 1,649
629 - 899
49
Professional Software
1,499
1,299
599
50
iPod
379 - 499
249 - 299
129 - 169
51
Sales by Product
52
He is the Guy
CEO of Apple Since 1998 - The guy turned Apple
around
53
Market Today
54
Stock Market
55
Stock Market
(What happened before 1998)
56
Earnings (before 1998)
57
Free Cash Flow (before 1998)
1996 1997 1998
FCF 341 101 729
Cash Flow Statement Operating, Financing,
Investing (Time of burning money)
58
Stock Market
(What happened between 1998 - 2000)
59
Earnings (1998-2000)
60
Free Cash Flow (1998-2000)
1998 1999 2000
FCF 729 751 719
Cash Flow Statement Operating, Financing,
Investing (Jobs start to saving Apple)
61
What is the Driver
New iMac saved Apple
62
Stock Market
What happened after 2000
63
2000 - the nightmare of PC

• Economical reason hurt PC industry
• Apple stock dropped sharply
• Jobs notes that PC making may not save Apple this
  time

64
Earnings (2001-today)
65
Free Cash Flow (2002-2004)
2002 2003 2004
FCF -85 125 760
Cash Flow Statement Operating, Financing,
Investing (Jobs new idea of Saving Apple)
66
What is the Driver
iPod and iTunes turned Apple around
iPod introduced year 2001
67
Balance Sheet
2002 2003 2004
P-BE 1.26 1.70 4.97
net Asset 5,143,882 7,195,855 25,208,993
68
Forecasting

• Driver today (iPod and iTunes)
• Driver tomorrow (More related product)
• Or is it (Apple is changing)

69
What make Mac a Mac

• Operating System (Mac OS X)
• CPU (G5 made by IBM)

70
Mac or PC
Apple moving to Intel
71
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
P0 99.3
72
Buy or Sell

• Growth was unreal
• P/E is high
• Almost the end of year...

73
Fishers Theory

• The Sales Growth and Product Development - Strong
• Strong sale growth
• Leading product innovator
• Management Efficiency - Strong
• Effective Management (Jobs team)

74
Fishers Theory

• Competition - Strong in digital music player
• The competition is high
• The best seller of portable music player
• Stock price - High

75
Current Situation
Strong sale of 2005 last quarter
76
Recommendation

• It it not a good time to buy
• If you bought it months ago you can hold until
  end of the year and then sell it before the
  Holiday

77
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78
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

79
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.

80
DELL Stock (NASDAQ)
81
DELL Stock
DELL-Q  Last Trade Nov 01, 2005 1600 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 High  42.570 Annual Div.  0.00
52-Week Low  30.820 Yield  0.00
82
Performance In Recent Five Year(2000-2005)
83
Volume of Shares
84
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.

85
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

86
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

87
Percentage of Revenue, by product line
2005 2004 2003 2002 2001
Desktops 50 51 53 53 53
Notebooks 29 27 27 28 29
Enterprise 21 22 20 19 18
Total 100 100 100 100 100
88
Area Revenue Comparison
89
Financial Statement Analysis

• Using the three financial statements
• Income statement
• Balance sheet
• Cash flow statement
• The latest quarter statement

90
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
91
Price to Book Value of Equity
92
Price to Earnings
93
Revenue growth(in millions of dollar)
94
Cost Structure
95
Profit Margin
96
GAAP Net Income Growth Trend (in millions of
dollars)
97
Balance Sheet Statement (Assets)
Assets Assets Assets Assets Assets
Current Assets Current Assets Current Assets Current 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  
Inventory 459,000   327,000   306,000  
Other Current Assets 2,217,000   1,519,000   1,394,000  

Total Current Assets Total Current Assets 16,897,000   10,633,000   8,924,000  
Long Term Investments Long Term Investments 4,319,000   6,770,000   5,267,000  
Property Plant and Equipment Property Plant and Equipment 1,691,000   1,517,000   913,000  
Other Assets Other Assets 308,000   391,000   366,000  

Total Assets Total Assets 23,215,000   19,311,000   15,470,000
98
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
Operating Activities, Cash Flows Provided by or Used in Operating Activities, Cash Flows Provided by or Used in Operating Activities, Cash Flows Provided by or Used in Operating Activities, Cash Flows Provided by or Used in
Depreciation 334,000 263,000 211,000
Adjustment To Net Income (275,000) (383,000) (217,000)
Changes In Accounts Receivables 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 Changes In Other Operating Activities 2,208,000 (139,000) (176,000)

Total Cash Flow From Operating Activities Total Cash Flow From Operating Activities 5,310,000 3,670,000 3,538,000
99
Cash Flow Statement (Continued)
Investing Activities, Cash Flows Provided By or Used in Investing Activities, Cash Flows Provided By or Used in Investing Activities, Cash Flows Provided By or Used in
Capital Expenditure (525,000) (329,000) (305,000)
Investment (1,792,000) (2,021,000) (1,076,000)
Other Cash flows from Investing Activities Other Cash flows from Investing Activities (464,000)
Total Cash Flows from Investing Activities Total Cash Flows from Investing Activities (2,317,000) (2,814,000) (1,381,000)
Financing Activities, Cash Flows Provided By or Used in Financing Activities, Cash Flows Provided By or Used in Financing Activities, Cash Flows Provided By or Used in
Dividend Paid - - -
Sale Purchase of Stock (3,128,000) (1,383,000) (2,025,000)
Net Borrowings - - -
Total Cash Flows From Financing Activities Total Cash Flows From Financing Activities (3,128,000) (1,383,000) (2,025,000)
Effect of Exchange Rate Changes Effect of Exchange Rate Changes 565,000 612,000 459,000
Change In Cash and Cash Equivalents Change In Cash and Cash Equivalents 430,000 85,000 591,000
Free Cash Flow Free Cash Flow 4,785,ooo 3,341,000 1,817,000

100
Net Cash Increase
101
Quarterly Statement
Ratios Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results
Q2-FY06 Q1-FY06 Q4-FY05 Q3-FY05 Q2-FY05

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 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
102
Quarterly Assets Statement
Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results Prior 5 Quarter Results
Q2-FY06 Q1-FY06 Q4-FY05 Q3-FY05 Q2-FY05
Assets
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
PPE, 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
103
Return on Equity
104
Return of Assets
105
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.

106
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 RD but better on satisfying
  market demand
• Growth of earnings
• Earning from investing in the financial market

107
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.

108
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)

109
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 SP 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 FCFE0 (1g)/(k - g)
• The growth g 0.1894

110
Recommendation

• The price of the Dell is 33.60 below the current
  price 29.94.
• BUY Now!!