Hewlett Packard (NYSE:HPQ) has shown a 72.98% year-to-date increase in its stock price. This rally has been beneficial for the entire PC industry. Its quarterly earnings are the drivers of this unprecedented growth. But in my opinion, this increase in price is only a representation of a PC industry recovery bubble. The fundamentals don't support the positive movement of the company's stock price and as an investor. It is wise to get you to understand what's truly happening inside HPQ's financials. The mark of the cancer is shown and I want you to get out of it before it worsens.
Price Movement Analysis
HP's financials show that revenues are 6.8% lower as the PC market continues to slow down in the smartphone and tablet market era. Year-over-year, the company has seen revenues fall from $126.8B to $119.9B. This decline in revenues is accompanied by the increase in SGA expenses, which led to the diminution of bottom line figures. HPQ's net income significantly dropped from $7B to a loss of $12B due to an impairment of goodwill and a lower operating margin. Fundamentally speaking, the company's recent financial and operational performance in hard numbers is worrisome despite the positive movement for the stock price. Moreover, sales of the PC, which is HPQ's strongest division, also dropped by 24% based on the Q2 2013 figures.
Now let's talk about the balance sheet figures. The company's assets decreased by 19% thus deflating shareholders' value in the company. The company's efficiency in terms of managing COGS is at 27.53 days, which belongs to the lower portion of the industry averages. In summary, in terms of profitability and efficiency, the company's financials do not correlate to the positive appreciation of the shares.
Quarterly Earnings Analysis
source: Bloomberg Businessweek
Hewlett-Packard, in its latest earnings for Q2 2013, has exceeded expectations, arriving at earnings of $0.87 per share compared to analysts' estimate of $0.81-$0.85. It indicated a positive surprise of +7.46% increase from last quarter's earnings-per-share but still not above the earnings the previous fiscal year while the price increased 72.68%. The current quarterly earnings of the company do not justify the market's reaction of increasing the price, meaning the company is trading at a much higher level, making it a very over-valued company. There is a great disconnect between the financials of the company and how the market perceives its performance. It is to be expected that Q4 earnings-per-share will reach the $1 mark, which is still short compared to last year's Q4 earnings of $1.16 a share. I believe that HPQ is now trading at the resistance level and will soon be hitting the support level as investors rush to take profit.
Moreover, the positive market response toward HPQ this FY2013 is merely the result of its improvement from the relatively weak expectations of analysts and public investors alike. The recent rallies are all market-driven and are not backed up by the company's fundamentals, thus creating a bubble.
Overall analysis suggests that HPQ has not performed splendidly relative to its fundamentals while the market is alarmingly responding very well. The negatives outweigh the positives for HPQ. The reason why financial indicators remain low while the stock price continues to beat expectations is because investors tend to overreact to the earnings of the company, which is nothing more than a reaction to the already weak and conservative expectations. The current valuations and estimates were not priced in the company's stock performance making it the start of a company bubble. A solid fundamental foundation is lacking in the rising stock price of the company, making the crash inevitable. Furthermore, the company hasn't added any value to the shareholders for the past year. To make it clear HPQ has only restored some of its lost value and with the way its price is increasing is not a healthy sign of an equity value - it is bound to crash soon. The indicators and fundamentals for me clearly spell that this is the start of a company specific bubble and I want you, as an investor, to get out of it before it bursts. I recommend selling HPQ shares above $24.65 in the short-term to take advantage of the market-driven high price.