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Hewlett-Packard (NYSE: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 (NASDAQ: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 (NASDAQ:GOOG) dominating the tech market, HP is seen as a technology dinosaur similar to Microsoft (NASDAQ: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