Can Lenovo Overcome the Negative PC Bias?

NEW YORK (TheStreet) -- Personal computers are a dying. I'm not attempting to reveal anything new with that statement. In fact, it has become a foregone conclusion for quite some time. PCs are now being replaced by mobile and more agile devices from Apple (AAPL), Google (GOOG) and Samsung.

If you look at how Hewlett-Packard ( HPQ) and Dell ( DELL) have traded recently, it is easy to see the market has been merciless in punishing anything associated with PCs.

Even Microsoft ( MSFT) which many will contend was the true force behind the dominance of PCs has essentially thrown its hands up by announcing its Surface tablet -- essentially signaling to both HP and Dell that it's now every man for himself.

But nobody remembered to tell Lenovo ( LNVGY.PK), China's largest PC maker, that it shouldn't be performing so well.

In today's climate, over 90% of Lenovo's $30 billion annual revenue still comes from personal computers -- an impressive accomplishment on many levels. This includes being the brand of choice for one third of every PC sold in China, a market with a population of over 1 billion people.

Yet the company remains a relative unknown among investors. Not many had even heard of Lenovo until it acquired IBM's ( IBM) popular line of ThinkPad notebooks back in 2005.

After growing its global PC sales last year by 4%, the company is now projected to surpass HP by 2013 in terms of PC production. But Lenovo does not seem content. It now has its sights set on the mobile device and tablet market.

Can it take on Apple's iPad dominance? That's a pretty tall task. And considering the results of its most recent quarter, it seems that the company's efforts would be better served growing its margins instead of focusing its sites on Apple.

But it's hard to not want to give it the benefit of the doubt -- particularly because it appears to have a sound management team with a good understanding of what drives revenue growth. Impressively, the company was able to growth its shipments by almost 25% in an environment when the global PC market saw a shipment decline of roughly 1%.

What's more, in its most recent quarter, the company reported growth in revenue and operating profits -- climbed 35% and 46% respectively with absolute margins registering at 2.3%. In other words, PCs are dying everywhere except those made by Lenovo.

However, it's challenge remains growing its U.S. market share to match what it has established, not only in China, but in markets such as India and Russia where its enjoys pie slices of 17% and 12% respectively.

As it seeks to enter the realm of mobile devices, I wonder if Lenovo has just become bored with its PC success or does it really see a significant growth opportunity outside of its core business? Microsoft has been trying to take on Apple and Google for years in this area with little success.

Although I sound a bit apprehensive about its prospects, Lenovo appears to be making some decent strides by having already amassed a 12% share in China and quickly becoming the country's second largest smartphone company behind Samsung.

How undervalued does Lenovo appear to be? Projecting just 2% free cash flow compound growth over the next decade is sufficient to fuel a target price well into the $20s, even with an above-average discount rate.

Although I don't think Lenovo is going to get much attention until investors feel better about the health of China's economy, I believe this is an undervalued way to play ongoing IT hardware demand growth in multiple emerging markets.

Bottom Line

Lenovo deserves more love than it gets from investors. While the company is operating on all cylinders, it is still a relatively unknown. But I think with its tablet and smartphone objectives this is all about to change.

It is not out of the realm of possibility that Lenovo might consider making a play for a company such as Research in Motion ( RIMM). I can't think of a better way for it to make a splash on the market while also announcing its presence in the U.S. in the most authoritative way.

However, I'm not holding my breath. Though the company has the cash to make something like this happen, it's just not its style. As a result, it will continue to be ignored as the negative PC bias continues, and despite the obvious value in its shares. Although it operates a successful business with strong fundamentals, it has much work to do to overcome that which it can't control -- investor sentiment.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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