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Hewlett-Packard (NYSE:HPQ) shares are up more than 100% after falling to $11.71 after news broke of accounting improprieties at Autonomy. After this rather quick doubling of the shares, there has been a renewed interest in the company and many are speculating that another double is on the way. While I believe a near or even intermediate-term doubling of the stock is unlikely, shares of HPQ still appear to offer an asymmetric return profile given the cheap multiple and strong free cash flow generation. CEO Meg Whitman has thus far performed well, and the company's operations are likely a year away from resuming organic revenue growth.

HP's investors are used to declining revenue growth, particularly within the personal systems business, but management has delivered on cutting costs. Costs declined 8.8% in Q2 YOY, and 3% sequentially.

Printing has benefited from higher margins, 3Par offerings have the potential to stabilize revenues in the enterprise group segment, cloud growth is driving services, and the highest-margin software business is becoming a larger piece of the consolidated operations. Even with the rapidly dying systems segment, HP has definite upside in its new model. Downside appears relatively limited as a result of the transformative cost-cuts and severely compressed valuation.

Operations

The relevant segments in terms of modeling are:

Personal Systems - Consumer and commercial PCs; workstations. You can probably model out 15-20% annual revenue declines for the next several years. Management seems committed to the business, but with the exception of commercial desktop sales, the growth in mobile has been brutal for this segment. Responsible for $1.7 billion in net income for Fiscal 2012, or $1.14/share.

Printing - Strategy is to sell higher margin inkjet printers and higher end ink. This is one of the few segments in which HP has been executing; operating margins rose 260 bps YOY to 15.8%. Responsible for $3.59 in fiscal '12 net, or $1.85/share.

Enterprise Group - Storage, systems, and networking. The networking business has grown for 14 consecutive quarters, and management highlighted the $1 billion revenue run rate in 3Par products (data storage). Converged storage products within 3Par were up 82% - as this offering becomes a larger part of the revenue mix, total revenues within this segment will stabilize. This segment was responsible for $2.13 in FY12 net income, or $1.09/share.

Enterprise Services - Tech outsourcing, business services, management suite offerings. HP is attempting to stabilize revenue in this segment by transitioning more of its business to cloud, security, and big data products. Management said it saw "triple-digit" YOY growth in Q2 in these offerings, though overall revenue was down 8%. Responsible for $2.09 in fiscal '12 EPS.

Software - The highest margin business HP has, but only responsible for about $882 million ($.45/share) in annual net income. Revenue growth has been around 20% for the past couple of years.

Balance Sheet/Capital Allocation

Net operating debt is expected to be essentially zero by the end of fiscal 2013, and is currently at $2.9 billion. Gross cash is $13.6 billion, allowing the company to take out $1.5 billion in debt during Q2 and another $1.75 billion in early Q3.

Outstanding shares declined 2% YOY to 1.947 billion. $8.1 billion is left on the share repurchase program, which would buy 16.7% of the outstanding shares at current prices.

Valuation

HPQ is guiding for $7.5 billion in fiscal '13 cash flow, and $3.55 for mid-point GAAP earnings.

Based on FCF, the shares are trading at a 6.3X multiple, giving investors a 15.9% FCF yield and an 18.6% total yield. On EPS, shares are trading at 6.88 forward multiple, a 53% discount to the broader market forward multiple of 14.68 (based on projected operating earnings).

Expected Upside

8X 2013 EPS: $28.4 = 16.3% IRR

10X 2013 EPS: $35.50 = 45% IRR

12 X 2013 EPS: $42.60 = 75% IRR

Conclusions

Meg Whitman seems confident that the company will return to revenue growth by 2014, though that seems to be quite optimistic. Even if they don't achieve organic growth by next year, continued margin expansion in most segments (driven by cost cuts and higher-margin product offerings) should continue to grow cash flows; operating cash flow was up 44% in Q2.

Management has delivered on most of the big-picture items, so I'm giving them the benefit of the doubt on this one. I think they'll meet 2013 guidance, implying a fair value around $35/share and 45% one-year upside.

Source: Even After Doubling, Shares Of HP Still 45% Undervalued

Additional disclosure: Long Jan 15 LEAPS