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Hewlett-Packard (NYSE:HPQ), the iconic tech giant that was started out of a garage in 1939, by William Hewlett and David Packard, two tech visionaries way ahead of their respective times, reports their fiscal 4th quarter, 2013 financial results after the bell next Tuesday, November 26th, 2013.

Analyst consensus is looking for $1.00 in earnings per share on $27.923 billion in revenues for expected declines of -13% and -7%. With the 4th quarter, '13, HPQ will begin to lap the weakest period of PC growth in years, that was coincident with the launch of Windows 8 and the explosion in tablets.

Analysts' consensus has remained stable for EPS since following the troublesome 3rd quarter report, the estimate for the 4th quarter was $1.00 per share. Revenue consensus has actually increased a smidge, which was somewhat surprising: the original revenue estimate was $27.900 even after the August '13 report.

Given Cisco's (NASDAQ:CSCO) results there is some worries over HPQ's report since CSCO had a disastrous emerging market quarter, and a very strong data center quarter. In HPQ's 3rd quarter, Europe and China were weak, while the US was thought to have "mis-executed".

CSCO's strength in data center is thought to be another formidable competitor in the server market as CSCO has supposedly taken share from Dell (NASDAQ:DELL), and is now zeroing in on HPQ and IBM (NYSE:IBM).

Finally, an aggressive Dell was thought to be have pressured HPQ Enterprise last quarter, and since they have now gone private, the question remains whether they will be more of a rational or irrational competitor. As a private company, and since quarterly results don't have to be reported, Dell should be a rational competitor since they can stop worrying about the "quarter" and focus more on longer-term opportunity.

The aura of negativity and pessimism still surrounds the stock, which is understandable, but for our clients, that represents opportunity.

As we detail here on our blog, we acquired a 1% position in HPQ starting with the sell-off in the stock following the bad news around the 3rd quarter, 2013 report. HPQ reported an 8% drop in revenues on a 14% decline in EPS, which isn't that bad given their historical numbers the last few years, but expectations had gotten too high.

That is not the case currently.

Although this table could be horribly garbled, it represents our breakdown of HPQ's cash-flow statement to shows free-cash-flow and how it is being utilized. A couple of points:

1.) HPQ's current free-cash-flow yield is 18% which is pretty high. The free-cash-flow yield is defined as HPQ's 4-quarter trailing free-cash-flow divided by their market cap at the time of the earnings report;

2.) HPQ is only returning 20% to 30% of HPQ's free-cash-flow currently. Meg and the Board could be waiting on a transforming acquisition, or the stash could be custodied overseas, too. Either way, at some point it will likely be dispensed or returned (if only gradually) to shareholders, if a transforming acquisition isn't made. What we liked to see is that this summer, as the stock traded up to $28, management slowed their share repurchases, from which we can infer that management is being very disciplined about the buy-back;

3.) Not shown is that HPQ has cut their outstanding long-term debt from $26 billion to $17 billion currently, even though free-cash-flow has improved. (Another good sign in our opinion.)

7/13 q34/13 q21/13 q110/12 q47/12 q34/12 q21/12 q110/11 q47/11 q34/11 q21/11 q110/10 q47/10 q34/10 q21/10 q110/09 q4
Cash from operations$2,674$3,556$2,562$4,059$2,846$2,473$1,193$2,400$3,207$3,962$3,070$3,151$3,273$3,091$2,407$3,433
Cash from investing($661)($554)($644)($610)($825)($1,267)($751)($11,466)($911)($1,219)($363)($5,066)($2,353)($3,229)($711)($882)
Cash from financing($2,002)($2,351)($630)($1,657)($823)($1,008)($372)$4,156($2,081)$61($3,702)($1,874)($333)$722($1,428)($2,793)
Net change in cash$11$651$1,288$1,792$1,198$198$70($4,910)$215$2,804($995)($3,789)$587$584$268($242)
Cash from operations$2,674$3,556$2,562$4,059$2,846$2,473$1,193$2,400$3,207$3,962$3,070$3,151$3,273$3,091$2,407$3,433
Capex (excl acquisitions)($880)($767)($633)($870)($870)($1,080)($883)($1,385)($1,128)($1,100)($926)($1,232)($1,130)($950)($821)($946)
4q trailing CFO$12,851$13,023$11,940$10,571$8,912$9,273$10,762$12,639$13,390$13,456$12,585$11,922$12,204
yoy growth44%40%11%-16%-33%-31%-14%6%10%
4q trailing capex$3,150$3,140$3,453$3,703$4,218$4,476$4,496$4,539$4,386$4,388$4,238$4,133$3,847
y/y growth-25%-30%-23%-18%-4%2%6%10%14%
4q trailing FCF$9,701$9,883$8,487$6,868$4,694$4,797$6,266$8,100$9,004$9,068$8,347$7,789$8,357
yoy growth107%106%35%-15%-48%-47%-25%4%8%
FCF Yield
FCF as % of market cap18%23%26%26%13%
4q trailing net income$6,974$7,557$7,808$8,035$7,763$8,072$8,840$10,038$10,567
CFO as % of net income184%172%153%132%115%115%122%126%127%
share repurchases$3$797$253$125$498$498$498$2,529$2,529$2,529$2,529$2,760$2,760$2,760$2,760$1,285
total capital returned$283$1,080$511$377$750$750$750$2,740$2,740$2,740$2,740$2,953$2,953$2,953$2,953$1,477
4q trailing dividend$1,073$1,045$1,014$1,008$967$926$885$844$826$808$790$772$771$769$768$766
4q trailing share repo's$1,178$1,673$1,374$1,619$4,023$6,054$8,085$10,116$10,347$10,578$10,809$11,040$9,565$8,090$6,615$5,140
4q trailing total capital returned$2,251$2,718$2,388$2,627$4,990$6,980$8,970$10,960$11,173$11,386$11,599$11,812$10,336$8,859$7,383$5,906
FCF as % of capital retn'd23%28%28%38%106%146%143%135%124%126%139%152%124%

In terms of valuation HPQ is currently trading at 8(x) 2013 EPS for expected -12% growth this year, and then 3% and 0% growth the next two years. There is the rub: current EPS and revenue expectations for 2014 and 2015 are looking for barely positive EPS growth and flat to slightly negative revenue growth.

That is a tough competitive environment for any company. At 4(x) cash-flow with a 2.5% dividend yield, we are going to stock with the stock and allow Meg more time to transform the company into the next-gen tech company.

Meg has a tough job, but ultimately, I think she can do it. One red flag for us would be a reduction in the dividend, If that happens then we would get very worried about the stock.

Our internal valuation model, puts an intrinsic value on HPQ of $30, while Morningstar puts an intrinsic value on the stock of $24.

To be frank, we are putting some emphasis on at least a low-single growth rate for the PC business as we move in 2014. There is some talk HPQ is shopping for a 3D printing company, which would be "next gen" in scope, but I hope HPQ doesn't trash cash and balance sheet in the process.

We think HPQ could trade to $30 once again. Better economic growth is coming as is better employment, both of which should help old tech. A trade below early October's 2013 low of near $20 on heavy volume and we would be out of the shares.

Disclosure: I am long HPQ. 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: Still A Believer In Hewlett-Packard: It's All About Cash Flow