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Summary

  • Valuation still reasonable.
  • Still worried about revenue growth or lack thereof, which is biggest negative to HPQ's story.
  • Resurgent PC business the biggest plus last 3 quarters.
  • Cash-flow and free-cash-flow valuations biggest positive.

Hewlett-Packard (NYSE:HPQ) reports their fiscal Q3 '14 financial results after the close on Wednesday, August 20th.

Analyst consensus is expecting $26.99 billion in revenue to generate $0.89 in EPS, for expected year-over-year growth of -1% and 3%.

The consensus estimates have risen slightly since the May '14 q2 report.

Last quarter, more headcount reductions were announced, as Europe and the Enterprise were the biggest issues in what was a subdued quarter.

Frankly, it is a tough way to accomplish the growth and I'm sure Meg Whitman would prefer revenue growth, but if job cuts continue to help and stabilize EPS growth, while the company is reconfigured and re-engineered for revenue growth, the shareholder is protected.

The positives last quarter (fiscal q2 '14) were the continued recovery in the PC business, the networking business and geographically, EMEA (Europe, Middle East and Australia).

The PC and Personal Systems Group (OTC:PSG) has seen two consecutive quarters of revenue growth at 2%, 3% the last two quarters, has also seen operating income growth of 7% and 19% respectively, the last two quarters, which is good leverage of low single digit revenue growth.

Valuation Metrics:

HPQ is trading at roughly 8(x) fiscal '14 earnings for what current Thomson Reuters consensus is projecting an average EPS growth of 7% over the next three years, driven by a consensus average -1% revenue growth expectation over the next three years.

Without a doubt the biggest positive around HPQ's fundamental story is its cash-flow: HPQ at $35 is trading at roughly 7(x) 4-quarter trailing cash-flow, 4(x) cash-flow (ex cash) and 6(x) free-cash-flow (ex-cash).

Those are tough cash-flow valuations to find today.

HPQ's biggest negative is the continued negative revenue growth expectation, over the next 3 years.

HPQ has actually reduced their long-term debt exposure the last two years from 20% debt to cap, to the current 17%. In dollars, long-term debt has been reduced from $26 bl. at its peak in April, 2012 to just over $17 bl. as of May '14.

What this tells me is that even if HPQ has a tough quarter, there is still room to utilize free-cash-flow for a bigger buyback, and the company has room for additional debt as it improves it's credit rating.

There are a lot of things going right for HPQ right now, but it is still a turnaround story, versus a "growth" story.

HPQ needs revenue growth, but the cash-flow valuation and the trend in the other metrics is keeping me comfortable as a long-term shareholder.

Meg Whitman has done a good job stabilizing the business. We bought our first Hewlett-Packard PC for the office recently and will likely add a laptop soon. (We had been loyal Dell customers for years. I do wonder with Dell going private, how much of HPQ's PC business resurgence is due to the Vista transition, the growth in headcount and need to upgrade the Enterprise, and Dell's misfortune as a public company.)

HPQ has built their cash position and reduced their long-term debt.

Source: Hewlett-Packard Earnings Preview: 4X Cash Flow, Ex Balance Sheet Cash - Still A Fan