Cray Inc. (CRAY), Dell Inc. (DELL): Solid Value Play or Relic From an Earlier Time?

For tech-industry insiders and casual trend-watchers alike, supercomputers have all but faded from memory. Whereas massive mainframes and room-sized computing aids were ubiquitous and essential during the middle of the 20th century, recent technological breakthroughs have relegated such devices to niche status. These days, supercomputers exist mainly to perform highly specialized functions or sift through inconceivable amounts of tedious data.

Cray Inc. (NASDAQ:CRAY)

As a result, “supercomputer companies” are few and far between. Although it continues to sell its massive mainframes, Cray Inc. (NASDAQ:CRAY) has diversified its operational base and now produces servers, data storage systems and other cloud-focused solutions. Unfortunately, it is dwarfed by the big-name tech conglomerates with which it must compete. With fewer than 1,000 employees, Cray Inc. (NASDAQ:CRAY) looks like a runt next to industry powerhouses like Dell Inc. (NASDAQ:DELL) and International Business Machines Corp. (NYSE:IBM). Then again, its attractive stock price and surprisingly strong fundamentals may offer some value. Investors who have no aversion to out-of-favor companies may wish to take another look at Cray Inc. (NASDAQ:CRAY).

Cray vs. the Competition

It should be obvious that companies like Dell Inc. (NASDAQ:DELL) and IBM carry far more heft than niche players like Seattle-based Cray Inc. (NASDAQ:CRAY). However, investors should look beyond the multi-billion dollar market capitalizations of these industry veterans and take a closer look at balance-sheet fundamentals, valuation metrics and other sometimes-overlooked clues.

For starters, Cray Inc. (NASDAQ:CRAY) is surprisingly profitable. Its 2012 earnings of about $149 million came on total revenues of $388 million and produced a profit margin of nearly 40 percent. This is impressive relative to Dell Inc. (NASDAQ:DELL)’s $1.9 billion in earnings on $57 billion in revenues. That performance made for a margin of just over 3 percent. Although International Business Machines Corp. (NYSE:IBM) fared a bit better, its 2012 profit of $16.6 billion came on an eye-popping total take of $103 billion and made for a final margin of between 16 and 17 percent.

It should also be noted that International Business Machines Corp. (NYSE:IBM) and Dell Inc. (NASDAQ:DELL) carry decent amounts of debt on their books. Although few analysts have raised red flags over International Business Machines Corp. (NYSE:IBM)’s three-to-one debt-to-cash ratio, the company’s financial position should not be ignored. Meanwhile, Dell Inc. (NASDAQ:DELL) carries over $7 billion in long-term debt on its books and struggles with a shrinking cash flow. By contrast, Cray has no long-term debt and a decent reserve of cash. However, investors appear to remain wary of its unfavorable business model: Its price-to-book ratio of 2.2 is virtually identical to that of troubled Dell Inc. (NASDAQ:DELL) and less than 20 percent that of soaring International Business Machines Corp. (NYSE:IBM).