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Boxes of Dell computers roll off the assemby line in Round Rock, Tex. (AP)
Boxes of Dell computers roll off the assemby line in Round Rock, Tex. (AP)

Technology

Reboot in progress: Dell, HP investors in waiting mode Add to ...

Individual investors may view them as relics of an earlier technology era, but Dell Inc. and Hewlett-Packard Co. are selling the market a story of reinvention.

The share prices of both PC makers have soared 30 per cent since last September, lifted by expectations that they are slowly but surely transforming themselves into purveyors of a wider and more lucrative range of technology products and services.

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However, on Tuesday, Dell released fourth-quarter results that showed its transformation remains a bumpy journey. The Round Rock, Tex.-based company slightly exceeded revenue forecasts but missed analysts’ earnings expectations by a penny. It also said sales for the current quarter will likely fall short of targets.

Investors reacted by sending the shares down 5 per cent in after-hours trading, replaying a pattern from last November when Dell disappointed the Street with some of its third-quarter numbers.

For the three months ended Feb. 3, Dell reported profit of $764-million (U.S.) on revenue of $16-billion, representing an annual decline of 18 per cent and increase of 1 per cent, respectively. Results included revenue increases of 12 per cent for services, 3 per cent for desktop computers and 1 per cent for laptops and notebooks – still the lion’s share of Dell’s business.

In terms of market segment, reduced consumer and government spending dragged on performance as both groups struggled to shake the effects of the Great Recession, but sales to businesses of all sizes increased. Sales to consumers accounted for 20 per cent of overall revenue, down slightly from a year earlier and now representing the smallest revenue segment for the company.

“Our customers think of Dell in much broader terms now, trusting us with their comprehensive IT needs, from the data centre to the device,” Michael Dell, chairman and chief executive officer said in a news release.

Institutional investors such as Tennessee-based Southeastern Asset Management Inc. have been buying into Dell’s transformation story because they foresee much higher margins and earnings from the company’s refreshed product mix. Dell accounts for almost 9 per cent of the firm’s Longleaf Partners Fund, which looks to invest in undervalued companies.

“As the world becomes ‘unplugged,’ demand for solutions to manage hardware, software and security will grow,” Southeastern Asset Management said of Dell in its annual report published last week. The investment firm likes Dell’s ability to generate cash and a robust amount of free cash flow. It also notes that founder Michael Dell has been buying more shares. The company itself repurchased $2.7-billion worth of its stock in 2011.

The recurring question around Dell, however, is when will its potential value get unlocked. The shares trade at less than nine times estimated future earnings, compared with a multiple of almost 12 for shares of IBM.

On Wednesday, Hewlett-Packard is expected to release quarterly results that show its turnaround is at an even earlier stage than Dell’s. Analysts are expecting year-over-year sales to slip almost 5 per cent, to $30.8-billion, and profit to fall 46 per cent, to $1.40-billion.

But more important than the numbers will be comments by Meg Whitman, who last September became HP’s third CEO within 10 years. Investors are anxious to hear the former head of eBay Inc. outline her strategy for leading the Palo Alto, Calif.-based company back to greatness after years of neglect.

The Street is hoping she will commit to boosting spending in the PC and IT services units, as well as in the company’s overall research and development budget.

Amit Daryanani, of RBC Dominion Securities Inc., says it will be important see how HP plans to allocate capital under new management. The company will likely work to pay down debt and then implement a share buyback plan and dividend increases at some point after this fiscal year, he noted in a recent report.

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