Can Hewlett-Packard Continue Its Good Run?

| About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) has appreciated by about 37% in the last year. The company's free cash flow has created shareholder value and left the market with confidence about the future of company. Even though Hewlett-Packard experienced a 10% decline in revenues in its last report, it has generated enough cash to feed its dividend now at 2.3%. The company is currently valued at a forward price to earnings ratio of 6.83. This suggests that the market is expecting moderately high growth over the next few years.

Another Look At Hewlett-Packard

Another way to look at Hewlett-Packard is to analyze its capital expenditure, its cash conversion cycle, and its cost-cutting measures. The company's capital expenditure declined last quarter from the comparable quarter a year ago. This is continuing a trend that has become noticeable in the last few quarters. If we assume that the capital expenditure will continue its decline, this could increase Hewlett-Packard's dividend yield to 2.5% in the next fiscal year.

Hewlett-Packard has shortened the time it took to transform resources into sold products. This implies that money was not held up as it had been in the past few years. The shortened cash conversion cycle increased the cash from operations of Hewlett-Packard. Research by Morgan Stanley indicated that Hewlett-Packard could add another $800 million to its free cash flow in 2014 if it brings its cash conversion cycle down some more.

Additionally, Hewlett-Packard has continued to reduce its cost of operations and debt load. If we assume that the company can wring more money from its various sectors, it could add additional cash to its free cash flow.

Ralph Whitworth's Relational Investors is a major shareholder in Hewlett-Packard. It has a position of 35 million shares. Accipiter Capital Management, managed by Gabe Hoffman, is another major shareholder with a position of .3 million shares.

Comparing Hewlett Packard To Its Peers

Hewlett Packard's closest peers are IBM (NYSE:IBM), Accenture (NYSE:ACN), and Dell (NASDAQ:DELL). The forward P/Es of these three stocks are in the 10 - 17 range. In that sense, Hewlett Packard is priced cheaper than its peers. Of course, IBM has a strong brand and is growing its businesses particularly through the cloud-based sector. However, its earnings were down 1% in the last quarter. Even though analysts were disappointed by its performance, it certainly appears to be an interesting pick given that it is priced at a cheap forward price to earnings ratio of 10.53.

Accenture enjoyed a benefit of $50 million from a non-reduction in its reorganization liabilities. Combined with a 1% growth in net income, Accenture has an earnings per share of 4.47. However, there are doubts that the company can maintain this momentum to justify a cheaper forward price to earnings than Hewlett-Packard or IBM.

Dell carries trailing and forward P/Es of 12.42 and 10.06 respectively. Analysts' expectations are high enough to justify a five-year PEG ratio of 2.19. We note that the stock is up 8% in the last year against a falling market. The company's revenue and earnings fell due to a dip in the sales of personal computers.


IBM and Accenture are growing nicely. Based on their price multiples, they appear to be better buys than Dell, which is contemplating going private. Of course, we have noted the declining capital expenditure, cost-cutting measure, and the reduced cash conversion cycle of Hewlett-Packard. These are good developments in a company that has suffered from much abuse. Investors may want to research that issue with great concentration and focus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.