PC Industry
Presented by
Daniel Cheung, Kai Li
Xiaotao Wang, Xiang Ren
The Players
 Dell
 HP / Compaq
 Apple
 Gateway / eMachine
 Others
Market Shares
Q3 2005 World PC Shipments
18%
49%
16%
8%
4% 5%
Dell
HP
Lenovo
Acer
Fuitjitsu
Others
PC Sales by Region
70
60
50
Million 40
Units 30
USA
Worldwide
20
10
0
2001 2002 2003 2004 2005
Industry Performance
 NASDAQ Computer Index (IXCO)
Price Performance – 1 Year
Factors Affecting PC Industry
 Profit margin and parts cost
 Upgrading cycle
 Overall economical condition
 Oversea markets
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
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
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?
- 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 and
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
2004 Revenue Composition
17%
1% 1%
PSG
30%
IPG
ESS
2%
HPFS
HPS
19%
Software
30%
Corporate Investment
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
valueadded 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
Total net revenue $79,905
2003
2002
$73,061 $56,588
2001
$45,226
2000
1999
$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
0.83
(0.36)
0.21
1.87
1.73
Net earnings/share 1.16
Revenue
Revenue Change over the year
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
Series1
2004
2003
2002
2001
Year
2000
1999
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
76,138M 74,716M 70,710M 32,584M 34,009M 35,297M
Total Liability 38,574M 36,970M 34,448M 18,631M 19,800M 17,002M
Total equity
37,564M 37,746M 36,262M 13,953M 14,209M 18,295M
Return on
equity
0.093
0.067
-0.0249
0.029
0.26
0.191
1.62
1.85
1.46
2.85
4.33
12.49
61038.6
4M
69892.2
0M
52839.2
0M
39765.3
6M
61457.1
7M
228539.45
M
Price to
book value
equity
Net market
value of
shares
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
Share Outstanding
Share Outstanding vs Year
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1998 1999 2000 2001 2002 2003 2004 2005
Year
Fundamental Information
Valuation Ratio
(base on Oct 31,
2005 Yahoo data)
Hewlett-Packard
Co.
Industry:
Diversified
Computer Systems
Sector:
Technology
Market
Cap
80.1B
225.2B
4508.4B
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
128.04B
Hewlett-Packard Co.
HPQ
82.48B
Sun Microsystems Inc.
SUNW
12.72B
Scientific Games Corp.
SGMS
2.67B
Rackable Systems Inc.
RACK
337.45M
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
 One of the earliest company that make
personal computers

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
Business Strategy
Digital Hub (iPod, PDA, Camera)
 Expanded Distribution (Own store)
 Education (Free machine for school)
 Creative Professionals (Final cut…)

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
iPod
$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 iMac saved Apple
Stock Market
What happened after 2000
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

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
iPod and iTunes turned
Apple around
iPod 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 (iPod and iTunes)
 Driver tomorrow (More related product)
 Or is it… (Apple is changing)

What make Mac a “Mac”
Operating System (Mac OS X)
 CPU (G5 made by IBM)

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
P0 = $99.3
Buy or Sell
Growth was unreal
 P/E is high
 Almost the end of year...

Fisher’s Theory

The Sales Growth and Product
Development - Strong
 Strong
sale growth
 Leading product innovator

Management Efficiency - Strong
 Effective
Management (Jobs’ team)
Fisher’s Theory

Competition - Strong in digital music
player



The competition is high
The best seller of portable music player
Stock price - High
Current Situation
Strong sale of 2005 last quarter
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

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
2,900
2838
2,800
2,700
2631
2,600
2,565
2,584
2,602
2,582
2,536
2,531
2,500
2,400
2,400
2,300
2,200
2,100
1,997
1,998
1,999
2,000
2,001
2,002
2,003
2,004
2,005
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%
53%
Notebooks
29%
27%
27%
28%
29%
Enterprise
21%
22%
20%
19%
18%
100%
100%
100%
100%
100%
Total
Area Revenue Comparison
2005 Fiscal Year(ended on January 28)
Asia
PacificJapan
11%
Europe
22%
Americas
67%
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
60
54.52
50
40
30
25.29
20
18.37
12
10.8
10
0
2005
2004
2003
2002
2001
Price to Earnings
100.00
94.34
90.00
80.00
70.00
63.02
60.00
59.76
50.00
38.84
40.00
32.25
30.00
20.00
10.00
2005
2004
2003
2002
2001
Revenue growth(in millions of dollar)
70.0%
58.9%
60.0%
52.4%
48.0%
50.0%
38.5%
40.0%
30.0%
20.0%
46.5%
26.2%
18.7%
17.1%
13.6%
10.0%
-2.3%
0.0%
-10.0%
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Cost Structure
90.0%
81.6% 81.8% 82.0% 82.3%
80.0%
79.8% 79.3%
77.5% 77.9% 78.5%
70.0%
2005
2004
60.0%
2003
2002
50.0%
2001
40.0%
2000
1999
30.0%
1998
1997
20.0%
9.6%
9.7%
9.9%
9.7%
11.9% 11.7% 11.3% 11.4% 12.3%
10.0%
0.0%
Cost of Revenue
Total Operating Expense
Profit Margin
9.00%
7.66%
8.00%
7.00%
8.00%
6.68%
6.59%
6.83%
5.99%
6.00%
6.38%
6.18%
5.00%
4.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1997
1998
1999
2000
2001
2002
2003
2004
2005
GAAP Net Income Growth Trend
(in millions of dollars)
100.0%
90.4%
82.6%
82.2%
80.0%
70.3%
60.0%
54.7%
40.0%
30.7%
24.6%
20.0%
15.0%
14.1%
0.0%
-20.0%
-42.8%
-40.0%
-60.0%
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
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
Other Assets
308,000
391,000
366,000
Total Assets
23,215,000
19,311,000
Inventory
Other Current Assets
Total Current Assets
15,470,000
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
(525,000)
(329,000)
(305,000)
(1,792,000)
(2,021,000)
(1,076,000)
Other Cash flows from Investing Activities
Total Cash Flows from Investing Activities
(464,000)
(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
6,000
5,310
5,000
4,195
4,000
3,926
3,797
3,670
3,538
3,000
2,436
2,000
1,592
1,362
1,000
175
0
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Quarterly Statement
Ratios
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)
5
4
4
4
4
Days of sales outstanding 1
33
32
32
33
31
Days in accounts payable
76
75
73
71
70
Days supply in inventory
Cash flow (millions):
Cash flow from operations
Per share
Net free cash flows 2
Cash and investments
Shares repurchased (millions)
$
919
$
1,190
$
1,818
$
1,787
$
703
$
0.38
$
0.48
$
0.73
$
0.72
$
0.28
$
609
$
1,011
$
1,569
$
1,609
$
524
$ 12,671
$ 13,416
$ 14,127
$ 12,436
$ 11,810
47
50
22
38
25
Quarterly Assets Statement
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
570
483
459
415
418
2,739
2,439
2,217
2,124
2,055
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
345
320
308
285
446
22,687
23,215
21,054
19,932
Inventories
Other
Total current assets
Other non-current assets
Total assets:
22,611
Return on Equity
80.0%
73.0%
70.0%
62.9%
60.0%
50.0%
47.7%
46.9%
42.1%
43.5%
38.7%
40.0%
31.4%
30.0%
28.0%
26.5%
22.9%
20.0%
10.0%
0.0%
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Return of Assets
25.0%
22.1%
21.2%
20.0%
17.3%
16.2%
14.5%
15.0%
13.1%
13.7%
13.7%
12.7%
10.0%
9.3%
9.2%
5.0%
0.0%
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
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: FCFE0 (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!!