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Hewlett-Packard (HPQ) has had a rough year involving investor sentiment (and market price). Beginning with CEO Mark Hurd’s untimely “departure,” HPQ began a rapid decline - 43% year/year (y/y) - that was aided by market fears of a “dead PC” as well as phone and tablet dominance by Apple (AAPL). HP’s purchase of Palm has yet to yield sales gains, and the new webOS tablet is being offered at a $100 discount less than 1 month after the launch. With Apple and Google (GOOG) dominating the tech market, HP is seen as a technology dinosaur similar to Microsoft (MSFT).

Value-play
Hewlett-Packard has less than 12% debt to assets, and boasts strong liquidity with $12.7B cash available, supported by $7B of operating cash flow in the first six months of 2011. HPQ is trading at a trailing P/E of 8.35 (ex-cash P/E of 6.7), and earnings should grow y/y in 2011.
In the 2nd quarter, HPQ boosted revenue by 3% and EPS by 15%. If Q3 and Q4 EPS figures are flat y/y (flat is actually assuming a decline due to offset of buybacks), HPQ will earn $4.97 per share in 2011, representing a P/E of 6.2 (ex-cash P/E of 5).

Return to Shareholders
HP offers a quarterly dividend of 12 cents (1.56% yield) and this reflects a recent 50% dividend hike after 6 years of 8 cent payouts; however, HP announced new dividend goals in March that aims to increase return to investors. HP plans to annually increase the dividend at double-digit percentages, and with a current payout ratio of 13% there is plenty of room for growth.
Over the past 5 years, HP has repurchased approximately 600M net shares (22% reduction), and recently announced a new $10B repurchase plan on top of a remaining $6B from 2010. This represents 25% of outstanding shares at current market prices.

Upside Potential
While HP services and Hewlett-Packard under Leo Apotheker will continue to grow into the server and enterprise market (22.8% y/y increase), HP also has increased its financial services profits by 20.3% y/y and the personal systems segment profit by 14.6% y/y. However, the most exciting upside potential lies with the potential for success of the newly acquired webOS technology. Although the recent reports of price cutting present a fairly negative outlook, with an ex-cash forward (FY2011) EPS of 5, there is little downside to this play.
Source: Hewlett-Packard: Strong Value and Upside Potential