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Hewlett-Packard (NYSE:HPQ) reported their fiscal q1 '14 earnings after the bell last week, on Thursday, February 20th with actual results beating the analyst consensus coming into the call.

HPQ reported $28.15 bl in revenues generating actual EPS of $0.90 per share (versus estimates of $27.2 bl and $0.84 in EPS) for actual year-over-year (y/y) growth of -1% and +10%.

This was the best quarter of y/y earnings growth for HPQ since the July, 2011 quarter. This last quarter was also the smallest quarter of revenue decline for HPQ since late 2011, too.

There is no question that Meg Whitman is making a difference, although as you would expect it has been a slow boat to China (no pun intended).

What are the negatives as I see then right now?

1.) Last quarter, HPQ had $288 million of intellectual property and real estate sales gains in the P/L, that amounted to $288 million or $0.15 per share. The IP gain wasn't really vetted in the conference call to a great degree, and the $0.15 accounted for the entire earnings beat, which means the quality of the beat was quite low.

2.) Forward revenue growth estimates for 2014, 2015, and 2016, are still negative: -1%, -1% and -2% are the expected revenue growth estimates for the next three years;

That being said, I think the company has plenty of blue sky ahead, and I also think the stock is worth $37 - $40 per share, and here is why:

1.) Consensus earnings estimates for 2014, 2015 and 2016 are $3.71, $3.83 and $4.10 which is expected growth of 4%, 3% and 11%. EPS growth in 2012 and 2013 were -17% and -12%, respectively, so analysts are coming around to better EPS growth;

2.) HPQ still has a free-cash-flow yield of 15%, which given the attached cash-flow table, indicates that HPQ can return much more free-cash-flow to shareholders, without jeopardizing other aspects of business investment;

7/14 q34/14 q21/14 q110/13 q47/13 q34/13 q21/13 q110/12 q47/12 q34/12 q21/12 q110/11 q47/11 q34/11 q21/11 q110/10 q4
Cash from operations$2,990$2,816$2,674$3,556$2,562$4,059$2,846$2,473$1,193$2,400$3,207$3,962$3,070$3,151
Cash from investing($217)($944)($661)($554)($644)($610)($825)($1,267)($751)($11,466)($911)($1,219)($363)($5,066)
Cash from financing$1,229($2,960)($2,002)($2,351)($630)($1,657)($823)($1,008)($372)$4,156($2,081)$61($3,702)($1,874)
Net change in cash$4,002($1,088)$11$651$1,288$1,792$1,198$198$70($4,910)$215$2,804($995)($3,789)
Cash from operations$2,990$2,816$2,674$3,556$2,562$4,059$2,846$2,473$1,193$2,400$3,207$3,962$3,070$3,151
Capex (excl acquisitions)($997)($919)($880)($767)($633)($870)($870)($1,080)($883)($1,385)($1,128)($1,100)($926)($1,232)
Free-cash-flow$1,993$1,897$1,794$2,789$1,929$3,189$1,976$1,393$310$1,015$2,079$2,862$2,144$1,919
4q trailing CFO$12,036$11,608$12,851$13,023$11,940$10,571$8,912$9,273$10,762$12,639$13,390$13,456$12,585$11,922
yoy growth1%10%44%40%11%-16%-33%-31%-14%6%10%
4q trailing capex$3,563$3,199$3,150$3,140$3,453$3,703$4,218$4,476$4,496$4,539$4,386$4,388$4,238$4,133
y/y growth3%-14%-25%-30%-23%-18%-4%2%6%10%14%
4q trailing FCF$8,473$8,409$9,701$9,883$8,487$6,868$4,694$4,797$6,266$8,100$9,004$9,068$8,347$7,789
yoy growth0%22%107%106%35%-15%-48%-47%-25%4%8%
FCF Yield
FCF as % of market cap15%16%18%23%26%26%13%
4q trailing net income$6,472$6,652$6,974$7,557$7,808$8,035$7,763$8,072$8,840$10,038$10,567
CFO as % of net income186%175%184%172%153%132%115%115%122%126%127%
FCF as % of net income131%126%139%131%109%85%60%59%71%81%85%
dividends$278$284$280$283$258$252$252$252$252$211$211$211$211$193.0
share repurchases$565$479$3$797$253$125$498$498$498$2,529$2,529$2,529$2,529$2,760
total capital returned$843$763$283$1,080$511$377$750$750$750$2,740$2,740$2,740$2,740$2,953
4q trailing dividend$1,125$1,105$1,073$1,045$1,014$1,008$967$926$885$844$826$808$790$772
4q trailing share repo's$1,844$1,532$1,178$1,673$1,374$1,619$4,023$6,054$8,085$10,116$10,347$10,578$10,809$11,040
4q trailing total capital returned$2,969$2,637$2,251$2,718$2,388$2,627$4,990$6,980$8,970$10,960$11,173$11,386$11,599$11,812
Capital retn'd as % of FCF35%31%23%28%28%38%106%146%143%135%124%126%139%152%

HPQ is returning just 35% of their free-cash-flow (see last line), and FCF is improving so if the company wants to commit more capital in the form of dividends or buybacks, they have the room.

At 3.5(x) cash-flow and 5(x) free-cash-flow we like the risk - reward that HPQ presents at $29 - $30 per share.

At 7(x) 2014 EPS, the P/E is rational as well.

Personally I hope Meg repurchases shares, and does it in a disciplined way.

Here was our earnings preview, in which there is a table of HPQ's businesses by product line. Forward earnings estimates are now moving higher, while revenue estimates remain under pressure.

Morningstar retained their intrinsic value estimate for HPQ at $26, while our internal earnings-based model revised up HPQ's intrinsic value estimate from $32 to $37.50 per share.

We think a trade to $35 is easy, given the EPS estimates.

HPQ's turnaround is gaining steam, and the stock is still cheap to intrinsic value in our opinion.

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: Hewlett-Packard Earnings Summary: Turnaround Gains Steam, Stock Is Still Cheap

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