Hewlett-Packard (HPQ), the PC and printer giant that Meg Whitman is trying to resurrect from the ash heap of technological history, reports fiscal Q1 2013 results after the bell on Thursday, February 21, 2013.
Analyst consensus is looking for $0.71 in earnings per share on $27.7 billion in revenue for expected year-over-year declines of 23% and 7%, respectively.
We are not going to write a whole lot on HPQ given that readers are likely familiar with the story. 2012 was the worst year for PC sales since 2001, with HPQ likely seeing -0.5% y/y growth in PCs for calendar Q4 '12.
With the onslaught of Ultrabooks and tablets, not to mention the virtual desktop and the Cloud, the PC market is expected to remain weak through early 2013 and might see low-single-digit growth for some time to come.
The key to HPQ's story is the very cheap valuation. Here is a rundown of the key metrics:
P.E : At $16.50 per share HPQ is trading at 5(x), the fiscal '13, '15 and '15 earnings per share ((EPS)) estimates of $3.32, $3.49 and $3.27 for expected growth over the next three years of -18%, +5% and -6%.
Price-to-sales: HPQ's price to sales ratio as of the October earnings report was 0.22(x) market cap to 4-quarter trailing sales. The only stocks I've ever seen that trade that cheap on a P/S ratio basis were Best Buy, Sears Holdings, and Dell (which says something in and of itself).
Price-to-cash-flow: After October's quarterly release HPQ is selling at 3(x) cash-flow from operation and 4(x) free-cash-flow.
Free-cash-flow yield: 26% as of the October '12 earnings release.
HPQ bought back a lot of stock in 2011, and returned a lot of capital to shareholders probably under the assumption that the stock was really cheap as it fell from $45 to $25. While HPQ still has a lot of cash, they realize now they are in a real dogfight for survival. It looks like capital returned to shareholders is more in line with free-cash-flow generation than the last few years.
HPQ is flush with cash, $11 billion with $21 billion in long-term debt, so Meg Whitman always has the option of cutting operating expenses - (sales, general and administrative expenses ((SGA)) - which have been around 10% - 11% of revenues for the last 3 years, as well as divesting assets.
Some think the PC business is in secular decline, and we won't argue with that. But I continue to think that with the installed base of PCs around the world, it isn't going away altogether.
Our internal model values HPQ at $13, while Morningstar has a fair value on the stock of $17, so HPQ today is probably fairly valued as it stands right now.
What is the potential catalyst for HPQ to drive the stock price higher?
1.) As M&A heats up in general, HPQ could divest itself of the Printers or PSG;
2.) The PC market could resume growing once again;
3.) HPQ could pull an IBM and transform itself into a services business;
I am not as well versed in the intricacies of the tech sector as other sectors so these are educated guesses on my part. Is this a failed business model - the pessimists think so.
From perusing the EPS and revenue estimates, HPQ needs to start growing again. The cumulative revenue estimate over the next 3 years is looking for a further 10% decline in revenues and a 19% cumulative decline in EPS.
We remain long one small position in HPQ bought in the last few months in a long-term account, having sold the DELL position bought at the same time.
We have no current plans to buy any more HPQ at the present time. The valuation is compelling, but HPQ could also be a value trap. While we have faith in Meg Whitman, and she has been rocked by a number of surprises, I'd like to see the forward EPS and revenue estimates at least start to stabilize.
Disclosure: I am long HPQ.