Is Hewlett-Packard the Best PC-Recovery Investment?

Hewlett-Packard shares soared 6% on Friday after its earnings showed some improvements and the company announced further job cuts. Specifically, PCs look to be gaining momentum, following a rough 2012 and 2013, as the downtrend now finally appears to have reached an end. While there are many good ways to invest in this rebound, Western Digital and Seagate Technologies look to be two of the best.

Is the PC market showing positive momentum?
It's no surprise that shares of HP rose 6% on Friday, despite a 1% decline in year-over-year revenue, as the company announced 16,000 job cuts, adding to 34,000 last year. Nonetheless, HP continues to see weakness in its overall business, as the enterprise hardware and software segments weigh down its recovery.

With that said, HP has found one surprising strength in PCs during the last two quarters, after two years of continuous declines. In the first quarter, HP's PC revenue rose 4%, but in the second quarter, it accelerated to growth of 7% compared to last year.

This performance has not only given investors a reason for excitement, but is also further proof that the seemingly endless macro decline in PCs has reached an end.

Finding new markets, but ready to thrive
Clearly, HP has become a stock-of-choice for bargain hunters, up 135% since January 2013, and those betting on a full-blown recovery from the tech giant. At 8.6 times forward earnings, and with a 2% dividend, this interest is well validated, but still, HP is not the only investment that could rally with a return of the PC segment. Furthermore, PCs account for less than 30% of HP's business. Therefore, investing in a company that has higher exposure and even more to gain could create substantial stock returns.

Investors should also take a look at Western Digital and Seagate Technologies. Combined, these two companies control about 85% of the hard disk drive, or HDD, market, which includes storage used in PCs, laptops, and also DVRs, home entertainment systems, and the cloud.

Essentially, both companies are of similar size and structure within the space. In the past, Western Digital and Seagate accumulated nearly all of their revenues from HDDs in PCs and laptops, but with the rise of smartphones, tablets, and the cloud, they have had to become more resourceful.

Specifically, non-PC applications now account for roughly half of both companies' revenue. Western Digital and Seagate have made investments in solid state drives, or SSDs, which are also used for storage, but in the mobile space. For Western Digital in particular, its SSD business grew 46% in its last quarter to $134 million, but still accounts for less than 5% of total revenue.

Also, both companies have benefited from the cloud's rise, because although the cloud itself doesn't require HDDs, the information must be stored somewhere, and HDDs have been most common. Therefore, both companies have been able to counter much of the PC and laptop declines with the growth of the cloud, keeping high margins intact and revenues near flat.

Albeit, at 9.5 times forward earnings, and both companies dominating the space, there is a lot of business to gain if PCs continue to recover. Additionally, both companies are among the most shareholder-friendly in technology, with bullish dividends and generous buyback programs.

Final thoughts
HP may be a good investment, but if we're looking solely at the recovery of PCs and laptops, Seagate Technologies and Western Digital look better. However, in picking just one, Western Digital reigns superior.

In early 2013, both companies controlled about 43% of the HDD market, but today, Seagate has slipped to near 40%, while Western Digital has risen north of 45%. Thus, Western Digital has proven to be the better company in a tough macro environment, as this gap continues to widen. However, with both companies valued similarly, Western Digital has lower risk with equal upside, making it a good play on the PC/laptop recovery.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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