Why Hewlett-Packard Is Not A Sell

| About: HP Inc. (HPQ)

One of the largest American tech companies, Hewlett-Packard (NYSE:HPQ), has its fate tied to the personal computer industry. Unfortunately, consumers are trading in their gadgets for products like tablets and smartphones. While this gloomy development will continue to hurt Hewlett-Packard's fortunes for some time, there are brighter days in the horizon.


Of course, the stock fell 8% after last week's third quarter report. Hewlett-Packard's revenues were $27.2 billion, down 8% year-on-year. Non-GAAP diluted earnings per share went down 14% year-on-year to $0.86. Supplies revenues were down 4%. Professional services revenue was also down 11%. But there are reasons for hope.

Hewlett-Packard had a third-quarter GAAP diluted earnings per share of $0.71, up from a loss per share of $4.49. The company returned $283 million to shareholders. Total hardware units were up by 5%. Commercial hardware units went up 12%. Consumer hardware units went up 2%. Software revenues were up 1% year-on-year. SaaS revenues were up 4%. The company improved its operating net debt position by $1.7 billion, the sixth consecutive quarterly reduction of over $1 billion. Additionally, Hewlett-Packard has made a 56% gain so far in 2013, outperforming the Dow and other market benchmarks. Insider and fundamental analysis will reveal even more salient facts.


One of the most obvious benchmarks for hope is looking at the buying and selling decisions of insiders within a company. In Hewlett-Packard's case, insider purchases since 2009 have been a meek 16, compared to insider sales of 93. However, it is worth noting over 98% of insiders still retain substantial amounts of shares, meaning they have hope for future profit.

Hedge fund managers retain similar faith in Hewlett-Packard. At the end of March, 63 managers were invested in the company. The list includes Ralph Whitworth, Gabe Hoffman, Jeffrey Gendel, and Richard Pzena. It is believable that two factors with resources for analyzing Hewlett-Packard - insider and hedge funds - are seeing something fundamentally positive with the stock. When looking at valuation ratios, investors may have some reservations.


Hewlett-Packard's profit margin of -11.60% is lower than the technology industry average of 9.50, and lower than 15.54% for IBM, 6.74% for Juniper (NYSE:JNPR), and 2.37% for Dell (NASDAQ:DELL). Its return on assets at 4.90% is lower than the industry average of 33.5% and IBM at 11.79%. Hewlett-Packard's return on equity at -40.84% is lower than 82.78% for IBM, 4.21% for Juniper, and 13.05% for Dell. But investors who base their judgment on these figures could be making a mistake.

Hewlett-Packard's return on assets is higher than 3.24% for Juniper and 2.57% for Dell. Though its cash per share at 6.89 is lower than 9.49 for IBM, it is higher than 5.51 for Juniper and 6.73 for Dell. Hewlett-Packard's debt equity at 111.99 is lower than the industry and sector average at 128.8 and 113.66 respectively. It is also lower than 190.81 for IBM. At a beta of 1.67, Hewlett-Packard is less risky than Juniper (2.26). At a dividend yield of 2.10%, it is on par with IBM. With a price to sales of 0.37, it is cheaper than IBM (1.99), Juniper (2.26), and Dell (0.43).

Going forward, Hewlett-Packard at a forward P/E of 6.11 is cheaper than 10.10 for IBM, 14.90 for Juniper, and 12.10 for Dell. The company's EPS for next year is estimated at 3.65, higher than 1.34 for Juniper and 1.14 for Dell.


Analysts also have hope in the company. Brean Capital maintains a buy rating on the company. Citi upgraded the company to buy on a price target of $32 a share. Of 31 analysts polled by Thomson Reuters after the third quarter report, only 6 recommended selling the stock.


Hewlett-Packard has been steadily rebuilding in the past one year. The macroeconomic environment surrounding the company is positive. For example, Transparency Market Research said the global big data market was worth $6.3 billion in 2012 and is expected to reach $48.3 billion by 2018. If any of these reasons are not enough to persuade investors about Hewlett-Packard, they need only look at its estimated growth in the next five years for final confirmation. The company's EPS is expected to grow 1.29% per year. From its positive insider and hedge fund sentiments to its competitive fundamentals, Hewlett-Packard is definitely not a sell.

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.