1. PERSONAL COMPUTER INDUSTRY Claire Schnitzius Thanh Vo Mustafa Shah Tuan Hoang GROUP 17

2. INDUSTRY ANALYSIS

• Saturated, increasingly narrow profit margins

• Source of competition is price and company reputation

• Average net profit margin in the industry is 7.3%

• Average debt to equity ratio is .4

DUDE YOUR GETTING A DELL

3. THE COMPANIES

• We chose to analyze Dell, Hewlett-Packard, Apple, and Palm.

4. BUSINESS STRATEGY

• Palm strategy To become a leader in mobile computing, with emphasis on hand-held products

• HP strategy To make doing business with customers easier; transforming industry is an opportunity to grow

• Dell-Combining direct customer model with highly efficient manufacturing and supply chain management organization

• Apple- To bring its customers around the world compelling new products and solutions with ease-of-use, seamless integration, and innovative industrial design

5. PROFITABILITY

• ROA explains how effectively companies convert money they have to invest into net income

• ROA can be misleading when analyzing technology companies because people and technologies dont appear as assets for the company, since R&D must be expensed

• R&D is essential to technologically innovative firms

6. PROFITABILITY RATIOS

• Profitability Ratios include:

• • Profit margin for return on assets

• • Total asset turnover

• • Return on assets

• • Profit margin for return on common equity

• • Total asset turnover

• • Capital structure leverage, and

• • Return on common equity

7. PROFIT MARGIN FOR ROA 10.3 9.5 3.2 Apple 23.3 6.2 .8 Palm 6.9 4.8 4.7 HP 6.4 6.2 6.4 Dell 2006 2005 2004 %

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9. ASSET TURNOVER FOR ROA 1.3 1.9 5.6 Apple 1.6 1.5 1.5 Palm 1.2 1.1 2.1 HP 2.4 2.3 2.4 Dell 2006 2005 2004 %

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11. RETURN ON ASSETS 13.9 18.3 17.9 Apple 37.0 9.5 1.2 Palm 8.0 5.5 9.8 HP 15.5 14.4 15.3 Dell 2006 2005 2004 %

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13. PROFIT MARGIN FOR ROCE 10.3 9.5 3.2 Apple 23.3 6.2 .8 Palm 6.9 4.8 4.7 HP 6.4 6.2 6.4 Dell 2006 2005 2004 %

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15. ASSET TURNOVER FOR ROCE 1.3 1.9 5.6 Apple 1.6 1.5 1.5 Palm 1.2 1.1 2.1 HP 2.4 2.3 2.4 Dell 2006 2005 2004 %

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17. CAPITAL STRUCTURE LEVERAGE 1.6 2.0 1.8 Apple 1.3 1.6 1.7 Palm 2.1 2.1 2.0 HP 4.4 3.3 3.1 Dell 2006 2005 2004 %

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19. RETURN ON COMMON EQUITY 22.8 35.8 30.4 Apple 46.9 14.7 2.1 Palm 16.9 11.2 19.9 HP 67.5 47.8 47.5 Dell 2006 2005 2004 %

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21. SG&A EXPENSES AS A PERCENTAGE OF NET INCOME 16.3 17.2 23.1 Apple 15.8 16.6 19.9 Palm 12.3 12.9 13.1 HP 9.2 8.7 8.6 Dell 2006 2005 2004 %

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23. R&D EXPENSES AS A PERCENTAGE OF NET INCOME 3.9 4.0 5.9 Apple 8.6 7.1 7.3 Palm 4.0 4.0 4.5 HP .8 .9 1.1 Dell 2006 2005 2004 %

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25. NET PROFIT MARGIN 9.3 8.5 3.2 Apple 21.3 5.2 -2.3 Palm 6.8 2.8 4.4 HP 6.4 6.2 6.4 Dell 2006 2005 2004 %

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27. REVENUE GROWTH 38.6 68.3 Apple 24.3 33.8 Palm 5.7 8.5 HP 13.6 18.7 Dell 2006 2005 %

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29. LIQUIDITY

• Ability to convert an asset to cash quickly

• Significant for the personal computer industry because of the variable revenues

• • Lack of consistency in earnings

30. CURRENT RATIO 2.2 3.0 2.7 Apple 1.6 1.7 1.6 Palm 1.4 1.4 1.5 HP 1.1 1.2 .98 Dell 2006 2005 2004

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32. QUICK RATIO 1.7 2.6 2.0 Apple 1.5 1.6 1.4 Palm 1.1 1.1 1.2 HP .9 1.1 .8 Dell 2006 2005 2004

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34. SOLVENCY

• Ability of an entity to pay its debts with available cash

• Trend in the industry is to use equity financing instead of heavy debt financing

35. TOTAL LIABILITIES TO TOTAL ASSETS 42.0 35.5 85.8 Apple 8.3 36.4 34.7 Palm 53.5 51.9 50.7 HP 82.1 72.0 67.4 Dell 2006 2005 2004 %

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37. LONG TERM DEBT TO SHAREHOLDER EQUITY 7.5 8.1 6.7 Apple 9.1 57.3 53.2 Palm 6.5 9.1 12.3 HP 12.2 7.8 8.0 Dell 2006 2005 2004 %

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39. OPERATING CASH FLOW TO TOTAL LIABILITIES 39.3 72.7 36.3 Apple 65.0 38.0 -4.8 Palm 27.0 20.4 26.4 HP 27.1 35.7 31.1 Dell 2006 2005 2004 %

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41. RISK

• Competition levels of industry make profit margin predictability difficult

• Customer demand and desire for innovation could affect revenue and profit margin

• • Innovation must be maintained

• Also have to maintain and enforce intellectual property rights and be aware of infringing upon intellectual property

• Revenues and profitability fluctuate dramatically overtime, which makes forecasting extremely difficult

• Analysis of the industry is not an easy task, but following traditional analysis methods is one option

42. RISK

• Cisco was suing Apple and Steve Jobs for trademark infringement over the iPhone name

• Dell filed form 12b-25 with the SEC, which is a notification of late filing of the annual report

• Exploding batteries in Dell notebooks was another major issue

• HP settled civil charges over a corporate spying scandal with the California State Attorney Generals Office

43. Z-SCORE AND BANKRUPTCY PROBABILITY 2.68 .37% 2.91 .18% 3.37 .04% Apple 1.5 6.2% .7 23.4% 3.7 .01% Palm 2.0 2.6% 1.7 3.9% 1.8 4.0% HP 5.9 .03% 7.1 .03% 7.2 .03% Dell 2006 2005 2004

44. CONCLUSION

• Sustainability of the industry is assured

• Success of an individual company depends a lot on its ability to meet customer demand:

• • Innovation

• • Reliability

• • Quality

• • Affordability

• Struggle with the balance between profits and maintaining customers

• Companies in a niche market have a high probability of being bought out by industry leaders