The 3 Computer Stocks Delphi's Scott Black Wouldn't Own

At Barron's 2012 Art of Successful Investing Conference, renowned investor Scott Black of Delphi Asset Management commented on his stock holdings and the one sector he does not want to own right now.

"I would avoid the PC stocks," he said . "Obviously, I would not own Dell ( DELL ), Hewlett ( HPQ ) or Intel ( INTC ), even though Intel's a great company."

Computer sales have been increasing annually since 2001, but are expected to decline for the first time in 2011, according to research from HIS iSuppli. HIS iSuppli forecasts that PC shipments will decline 1.2% to 349 million, a decrease from 353 million last year. Gartner research reports that PC shipments declined by 8% in the third quarter, due to lack of the usual back-to-school PC sales bump.

Both of the research firms primarily blame the iPad for eroding PC sales.

"There was great hope through the first half that 2012 would prove to be a rebound year for the PC market," said Craig Stice, senior principal analyst for computer systems at IHS. "Optimism has vanished and turned to doubt, and the industry is now training its sights on 2013 to deliver the hoped-for rebound."

Black has developed a proprietary research process he has described as "old Warren Buffett -style," in which he requires his stocks to have the following criteria:

� Have over 14% return on equity

� Have a strong three-to-five-year record of earnings and revenue growth

� Have a P/B ratio under 2.5

� Are deleveraged

Some of the stocks he mentioned met a majority of his criteria, but are facing declining sales in their primary PC businesses.

Dell ( DELL )

Return on equity: 34.55

Five-year revenue growth: 5.5%

Five-year EBITDA growth: 10.9%

P/B ratio: 1.71

Long-term liabilities and debt: $13.44 billion

Dell is a computer and services company founded in 1984 and whose stock has declined 59% over the past five years to trade for $10.15 on Monday.

In the third quarter of fiscal 2013, the company's revenue from software and peripherals, mobility products and desktop PCs reduced 16%, 24% and 14%, respectively, in its large enterprise segment. Its consumer segment experienced a 23% revenue decline, due primarily to a challenging pricing environment, a decision to limit participation in lower-value offerings and competition from alternative mobile computing devices such as tablets, and smart phones. Desktop PC revenue in the sector declined 9% in the quarter, due to a 6% decline in the number of units sold and a 3% decline in the average selling price.

Overall, the company's revenue in the third quarter fell 11% year over year to $13.7 billion due to the contraction in desktop and mobility revenue. GAAP net income fell 47% to $475 million.

Dell is in the process of making a strategic transition to a portfolio of products that provide "higher-value and recurring revenue streams over time," it said in its most recent 10-K. As part of this strategy, we emphasize expansion of our enterprise solutions and services, which includes servers, networking, storage, and services. We believe the most attractive areas for profitable growth include data center and information management as well as client and cloud computing. We believe software will enhance our enterprise solutions, and accordingly, in early Fiscal 2013, we launched our newly formed software group to expand our ability to execute in strategic areas that are important to our customers. We now have four solutions groups to support our global business segments: enterprise solutions, services, end-user computing, and software."

It is also intensifying its focus on emerging countries and acquisitions to achieve growth. The shifts in strategy have led to an improvement in its operating margins.

Hewlett-Packard ( HPQ )

Return on equity: -55.2

Five-year revenue growth: 13.8%

Five-year EBITDA growth: 12%

P/B ratio: 1.21

Long-term liabilities and debt: $39.27 billion

Hewlett-Packard is technology, software, solutions and services company whose stock has lost 72% of its market value over the last five years to trade for $14.22 on Monday. PC, server, storage, networking and imaging and printing products compose the core of HP's business.

HP is also in the process of transformation. "As we discussed during our Securities Analyst Meeting last month, fiscal 2012 was the first year in a multiyear journey to turn HP around," said Meg Whitman, HP president and CEO.

In the fiscal year ended Oct. 31, HP's net revenue from its personal systems segment declined for the third year, to $35.7 billion from $39.57 billion in 2011. The decline included a 6.3% decline in notebook PC sales, a 3.4% decline in desktop PC sales and a 0.2% decline in workstation sales. The declines resulted from fewer PCs sold, and was partially offset by an increase in average selling prices.

Whitman was encouraged to see improvements in new product releases and customer wins. The company saw fourth quarter revenue increases in only two of its six segments: software and HP financial services.

Intel ( INTC )

Return on equity: 28.2%

Five-year revenue growth: 9.6%

Five-year EBITDA growth: 21.7%

P/B ratio: 2.09

Long-term liabilities and debt: $13.2 billion

Intel Corp. is a designer and manufacturer of integrated digital technology platforms. Its stock has declined 23% over the last five years to trade for $20.62 on Monday.

In its third quarter, Intel reported revenue of $8.6 billion in its PC client group segment, which was flat sequentially and down 8 percent year over year. Revenues increased year over year in its four other segments: data center group, other Intel architecture operating segments, software and services operating segments and all other.

The company attributed the PC client group sales decline to weakness in the macroeconomic environment, which caused softness in both the consumer and enterprise market segments. It also faced reduced inventory levels in the PC market due to macroeconomic uncertainty and the expected launch of Microsoft ( MSFT ) Windows 8. It is expecting a 1% sequential revenue increase for the fourth quarter 2012.

Our third-quarter results reflected a continuing tough economic environment," said Paul Otellini, Intel president and CEO. "The world of computing is in the midst of a period of breakthrough innovation and creativity. As we look to the fourth quarter, we're pleased with the continued progress in Ultrabooks and phones and excited about the range of Intel-based tablets coming to market."

The company is counting primarily on a strong product portfolio, including: its new Ultrabook to be released in the fourth quarter, a higher-performance and more energy-efficient server platform positioned for growth in the cloud computing and Internet data storage markets, new Intel-based smartphone designs launched in the third quarter such as the MegaFon Mint in Russia and Motorola RAZRi in certain European and Latin American countries, and 20 tablet designs based on its latest Intel Atom processors expected to be released along with the Windows 8 touch operating system in the fourth quarter.

Overall, Intel's fourth quarter revenue was $13.5 billion, flat year over year, and net income was $3 billion, up 5.1% year over year.

See more of the stocks Scott Black would own in his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Scott BlackAbout GuruFocus: tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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