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Tickers in this Article: EMC, IBM, DELL, NTAP, HPQ, HIT
What does the market reward? When it comes to enterprise computer hardware, we're going to take a look at three companies that do not need an introduction and see if we can find out what the market does reward. International Business Machines (NYSE: IBM) with a market capitalization approaching $165 billion, Dell Inc. (Nasdaq: DELL) with a market cap of $59 billion and EMC (NYSE: EMC) with a market cap of almost $34 billion are all large market participants, but there are some interesting differences and surprises.

The Big Blue Benchmark
Because of its size and scope, IBM, while not an official benchmark, can certainly act as a yardstick. IBM's strategic goal is to provide a complete package to a customer; hardware, software, services and even financing on a global scale. The company's global services group has been successful in producing these complete client packages, giving the company's customers the efficiency and productivity they need to be as competitive as they can.

Software has high margins when compared to hardware, and this part of IBM's business continues to gain in importance and revenue contribution. With product upgrades and refresh cycles, revenue from the hardware portion is volatile. However, with the growing need for storage capability, IBM has partnered with Network Appliance (Nasdaq: NTAP) to provide storage solutions for customers. This partnership has so far proved to be a winning combination.

For a company the size of IBM, its results have been impressive with year-over-year growth in earnings of 23.4%, and a net margin of 10.4% out of a gross of 42%, which resulted in a return on equity of 32%.

Dell Struggling to Keep Up
Dell has proved to be a master at supply-chain management, manufacturing acumen and cash management. Recognizing that its current business model of customer-direct business is becoming less effective, the company is in transition. It is going to take more than kiosks in shopping malls from now on. Faced with slowing demand from PC growth, at least in North America and Western Europe, Dell is increasingly looking at international opportunities. It also wants to produce more enterprise hardware such as servers and a move to more reliance on higher-margin software and peripherals. (Want to learn more about how companies make their money? Check out Getting To Know Business Models.)

Dell is also facing an increased number of competitors who are all putting pressure on its cost advantage and narrowing Dell's profit margins. In response, Dell will try to bundle additional products and services along with its hardware.

The financial results are somewhat mixed for Dell. While it showed an earnings growth of 23.7% year-over-year, the firm has a fairly thin net margin of 6% on a gross of 17.5%, but it manages a staggering 80.7% return on equity.


Continually Looking

EMC develops and delivers support-information infrastructure-products for its customers. The company has made a plethora of acquisitions in recent years, and it is always on the lookout for more to fill any gaps in its product suite. EMC is one of the preeminent names in the burgeoning data storage business.

EMC is as adept at investing in sales and marketing as it is in research and development. In a maturing industry, EMC has developed or acquired the technology necessary to best capitalize on the increasing need for data storage capacity. While the company has a very aggressive acquisition appetite, it also partners with companies such as Dell to leverage its capability as competitors such as IBM, Hewlett Packard (NYSE: HPQ) and Hitachi (NYSE: HIT) close in.

The company's financial results are a mixed bag as well, with year-over-year earnings growing at 14.9%, and growth over the last three at 34.9%. The company manages a net margin of 10.9% on a gross of 53.1%, yet only manages a return on equity of 11.4%.

IQ - The Innovation Quotient
What makes the difference to an investor... what does the market reward? If you had invested $10,000 in each of these companies two years ago, what would it be worth today? IBM would be worth about $13,900, DELL roughly $6,600 and EMC approximately $12,200. Why? We talked about earnings, margins and return on equity but the one figure we didn't mention was research and development budgets. How much money do these companies devote to the future? At IBM that figure is 6.6% or over $6 billion, at EMC about 11.8% or $1.37 billion and at Dell roughly 0.8%. It appears that you get paid to innovate - not stagnate.

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