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Overview

Hewlett-Packard (NYSE:HPQ) has been the Dow's best performer so far this year, and it hasn't really been all that close. The company's stock is up 87.15% on the year. The next closest Dow component is Boeing, up 39.95% in 2013. So the questions to ask are:

  1. Why has HPQ's stock performed so well?
  2. Will it continue to perform this well?

In determining the answers to these questions, I think it is important to look at the company's history, current valuation and financials, earnings and future outlook.

Reasons Why HPQ Has Performed So Well This Year

  1. Stock History - HPQ started 2013 at $15,14, near its 10-year low of $12.44. Early in 2012, HPQ was trading as high as $30. It's like the old saying, "when you hit rock bottom, there is nowhere to go but up." Whether or not last year was HPQ's rock bottom remains to be seen, but the huge drop in price the past couple of years (from $50s to low teens) is a big factor in HPQ's increase this year.
  2. Undervalued - While HPQ has had several challenges facing it recently, the stock was grossly undervalued at the start of the year. Even after its price increase this year, HPQ is trading at much lower values compared to some of its peers.
StockPrice/EarningsPrice/BookPrice/Cash Flow
HPQ7.0x2.2x1.7x
IBM11.8x11.7x9.5x
DELL9.2x2.2x5.7x
ACN17.9x8.2x14.7x
  1. Earnings - HPQ has beat earnings estimates in seven of its last eight quarterly reports. The last two quarters have been fairly impressive with beats of $0.11 per share and $0.06 per share.
  1. Dividends - An argument could be made that HPQ is turning into a solid growth dividend stock. After several years of a stagnant quarterly dividend of $0.08, HPQ has steadily raised its dividend the past couple of years.
DateAmount
6/10/2013$0.1452
3/11/2013$0.132
12/10/2012$0.132
9/10/2012$0.132
6/11/2012$0.132
3/12/2012$0.12
12/12/2011$0.12
9/12/2011$0.12
6/13/2011$0.12
3/14/2011$0.08
  1. Financials - A good portion of HPQ's gains came in one day. On May 22, the stock closed at $21.23. The next day, HPQ closed at $24.86, for a 17% one-day increase. This increase came as a result of Hewlett-Packard's earnings report that showed that while the company did post lower revenues and earnings, it did post a profit, which many were not expecting.

Will HPQ Continue to Perform Well?

Nobody knows the answer to this question as it is still too early to tell if HPQ will be able to transition its business successfully to the changing market. However, there are some good indications of how likely HPQ's success is.

  1. Stock History - In 2010, HPQ was trading above $50, so it is definitely possible that the company could once again reach this level. However, in 2010, Hewlett-Packard had a net income of $8,761 million. Last year, HPQ reported a substantial negative net income and appears on pace to do the same this year, so there is a lot of work that needs done in order for this stock to get back to its previous highs.
  2. Undervalued? - HPQ was undervalued at the start of the year, but is it now? When compared with some of its peers one could make an argument that the company is still undervalued, but when faced with the reality that HPQ has seen falling revenues and profits for seven quarters in a row, winning that argument might be difficult.
  3. Earnings - While HPQ has beat earnings estimates seven out of its last eight quarters, earnings growth is still lacking, with quarterly earnings growth (yoy) currently at negative 32.40%.
  4. Financials - Drops in earnings and revenue have become common with HPQ. There is no indication that another drop in sales will not occur with the next quarterly report.

Conclusion

While HPQ has performed amazingly well up to this point in the year, the chances of this continuing is far from certain. HPQ has done a lot of things to help (such as reducing costs and making gains in its enterprise services and printing supplies divisions). However, unless the company can do something to increase overall sales, it won't matter in the long run.

I don't think the company's stock is going to plummet anytime soon, but I don't think it's going to go much higher either over the course of the year. This doesn't mean that there are not moves to make.

Later this month, Hewlett-Packard will file its quarterly report. Analysts seem to have a history of underestimating HPQ when you consider the fact that the company has beat earnings estimates in 30 of its last 34 quarters. A beat of the $0.87 estimate for this quarter will not be surprising either.

If this happens, another bump in price may occur as it did with the company's last report. This could present a great time for current holders of HPQ to take some profits or it might be a good time for short-term investors to buy, hoping for a bump after the earnings report.

If you're a long-term investor, I think the price increase that has already occurred keeps HPQ from being a buy as there are plenty of other better stock options to currently choose from. I think it is definitely possible that HPQ eventually turns itself around, but I think the downside risk far exceeds the upside risk for this company, at least until it can prove that falling revenues will not continue indefinitely.

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.

Source: Is Hewlett-Packard, The Dow's Best Performer YTD, A Buy?