The Computer and Peripherals Industry is composed of a diverse group of companies. It produces a wide range of products for sale to just about all businesses and consumers. The industry tends to trail the economic cycle, and is very competitive.
This industry markets a wide range of products and services, many of which are tied to mainframe and server computers, personal computers, and storage devices. A number of offerings include gear to connect this hardware, both within a company and between businesses, suppliers, customers, and consumers. Keyboards and trackballs are other products, for example. In addition, some of the hardware providers offer services, such as installing and managing a business’ information technology operations, or hosting applications on an enterprise’s own computers that can be accessed by its customers. Others in the industry are wholesale distributors of computer products and services.
The customer base is as diverse as the industry. Some in the industry design and manufacture products that are sold to other industry participants. Most, though, market to businesses, both in the United States and overseas; federal, state, local, and foreign governments; and consumers. One thing investors should look at is customer concentration. If one or a few customers account for a large proportion of a company’s business, it usually will be noted in the business description box in the middle of the Value Line page. Sometimes there are only a few customers for a product, so a concentrated customer base may be unavoidable. Still, there is less risk of a major falloff in revenue from the loss of an account if the customer base is broad.
The Top Line
This is a growth industry. Businesses and governments have long been computerizing more and more of their work to increase competitiveness and efficiency. And, with the rise of the Internet, home computers, used to stay connected with friends and business, have become a necessity. The market should continue to grow. Businesses have to store and manage an increasing amount of data because of regulatory requirements and competitive needs. Too, whereas in the past, the data stored was primarily words and numbers, which take up relatively little storage space, now more capacity-hungry audio and video material is being computerized and stored.
It should be noted that this industry is somewhat recession-resistant, since many of its products and services can save money. Still, these companies certainly are not immune to economic downturns, since users can postpone buying a new computer and, as employees are laid off, fewer new machines are needed. Spending on computing gear usually holds up relatively well in the early months of a downturn, probably as already budgeted money is spent. Conversely, the industry’s revenue growth often lags coming out of a recession, presumably as businesses hold off making commitments for new systems until they are sure things are again on an upswing.
In considering individual companies, investors should focus on sales growth, since the members of this group vary so much in size. The Annual Rates box on the left side of the Value Line page has data on past and predicted sales growth rates. Without healthy top-line advances, consistent earnings gains are tough to come by.
Investors should also note the effect of foreign exchange on this group’s revenue. When the dollar is weak, it makes this nation’s products more attractive to overseas buyers. Furthermore, those sales are inflated when they are translated back into dollars. On the other hand, a strengthening dollar makes the industry’s products more expensive overseas, and revenues are further depressed when the currencies are translated into dollars. So, when considering a company as an investment, attention should be paid to the percentage of its revenue that is produced outside the U.S. What’s more, a broad exposure to world markets can cushion a weak market at home.
Again, because of the diverse nature of this industry, operating expense as a percent of revenue will vary widely from company to company. In general, there are economies of scale, so larger companies should have wider operating margins. But that won’t always hold true, since some companies may farm out the manufacturing of gear. Too, many of these businesses utilize labor in low-cost locations. One particular expense bears note. Usually, when research and development outlays account for a large proportion of revenue, this indicates that a company is investing to grow. If R&D is a significant part of a company’s total spending, it will be noted in the business description.
This industry is not for income seekers since very few of these companies pay dividends. Investors also should be aware that earnings predictability isn’t a strong point. That said, there are often a good number of timely equities in this group, and quite a few that have attractive long-term price-appreciation potential.
Investors should note that acquisitions are important contributors to growth for many companies in the industry. Buyouts can broaden the product line, increase the customer base, offer cross-selling opportunities, and be a source of additional service or maintenance fees. However, future acquisitions are not included in our sales and earnings projections because of the impossibility of predicting their timing or scope, so our figures may well be understated.