By Bud Labitan
Hewlett-Packard company (HPQ) is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses and large enterprises, including customers in the government, health and education sectors. Its operations are organized into seven segments: Services, Enterprise Storage and Servers (ESS), HP Software, the Personal Systems Group, the Imaging and Printing Group, HP Financial Services, and Corporate Investments. Services, ESS and HP Software are reported collectively as a broader HP Enterprise Business. In April 2010, the company completed its acquisition of 3Com Corporation. In July 2010, the company completed the acquisition of Palm, Inc. (Palm), In September 2010, it acquired Fortify Software. In September 2010, the company acquired 3PAR Inc., a global provider of utility storage. In October 2010, it acquired ArcSight, Inc., a security and compliance management company.
Does HPQ make for an intelligent investment or intelligent speculation today? Bloomberg reported that Paulson & Co., the $36 billion hedge fund founded by John Paulson, took a stake in Hewlett-Packard Co. and, Paulson bought 25 million shares in Hewlett-Packard, valued at about $1 billion, according to a regulatory filing yesterday.
Now, starting with a base estimate of annual Free Cash Flow at a value of approximately $8,000,000,000 and the number of shares outstanding at 2,174,000,000 shares; we used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here.
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $57.52.
- Market Price = $36.91
- Intrinsic Value = $57.52 (estimated)
- Debt/Equity ratio = .5
- Price To Value (P/V) ratio = .64 and the estimated bargain = 36. percent.
Before we make a purchase, we must decide (filter #1) if HPQ is a high quality business with good economics. Does HPQ have (filter #2) enduring competitive advantages, and does HPQ have (filter #3) honest and able management.
- The current price/earnings ratio = 10.1
- It's current return on capital = 12.3
- Using a debt to equity ratio of .5
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Does HPQ make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is HPQ the best place to invest our money today?
How will HPQ compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.
In summary, using a debt to equity ratio of .5, the estimated intrinsic value per share (discounted back to the present) is approximately $57.52. The Market Price = $36.91 and the Debt/Equity ratio = .5
The Price To Value (P/V) ratio = .64 and the estimated bargain = 36. percent.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon? President Obama has picked CIA Director Leon E. Panetta. In 1976, Panetta was elected to the U.S. Congress to represent California's 16th congressional district and Silicon Valley.
As always, I appreciate hearing your thoughts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.