Hewlett Packard (HPQ) has lost a lot of value over the past 2 years, falling from over $50 a share to below $25. There have been a number of missteps and analyst estimate reflect that, with EPS projected to fall 16% in FY12. However, despite the negative sentiment, the company still has revenues of over $120 billion and stands at #11 on the Fortune 500 ranking.
HP is very large and its businesses are diversified. Its operations are organized into seven business segments: The Personal Systems Group, Services, the Imaging and Printing Group, Enterprise Servers, Storage and Networking , HP Software, HP Financial Services and Corporate Investments. In each of the past three fiscal years, notebooks, desktops and printing supplies each accounted for more than 10% of its consolidated net revenue. In fiscal 2010 and 2011, infrastructure technology outsourcing services also accounted for more than 10% of its consolidated net revenue. Industry standard servers accounted for more than 10% of our consolidated net revenue in fiscal 2011. Note, the company is currently exploring separating the Personal Systems Group through a spin-off or other transaction. Here are six reasons why I think the stock is attractive.
Valuation: HPQ is trading at the bottom of its five year valuation range based on P/E, P/S, and P/B. HPQ’s current P/S ratio is 0.4 and it has averaged 0.9 over the past 5 years with a low of 0.4 and a high of 1.3. HPQ’s current P/E ratio is 7.6 and it has averaged 13.4 over the past 5 years with a low of 7.6 and a high of 19.3. HPQ’s current P/B ratio is 1.3 and it has averaged 2.5 over the past 5 years with a low of 1.3 and a high of 3.5. I think the recent purchase of the infrastructure software company, Autonomy, will be accreditive to earnings.
Price Target: The consensus price target for the analysts who follow HPQ is $31. That would be upside of over 20% from today’s price.
Forward Valuations: HP is currently trading for just 6.2 times fiscal year 2012 EPS. Cisco (CSCO) is trading for 10.1 times fiscal year 2012 EPS. Microsoft (MSFT) is trading for 9.4x FY12 EPS. Intel (INTC) is trading for 9.8 times fiscal year 202 EPS. IBM (IBM) is trading for 12.1 times fiscal year 2012 EPS. Compared to other tech giants, this is a steal. If HPQ just reaches the low end of the valuation, Microsoft's at 9.4 times, the share price would have to jump over 50%.
Cash Flow: Hewlett Packard has strong cash flow to support its earnings. Over the past 3 years, Hewlett Packard has averaged free cash flow of $9.2 billion. That would be free cash flow of $4.43 a share or 3-year free cash flow multiple of 5.7.
Shareholder Friendly: Hewlett Packard has spent over $26 billion over the past three years repurchasing shares. It has decreased share count by 17% over the time period.
Price Action: Hewlett Packard is trading at a share price that it hasn’t seen since 2005 when it was trading the $25 range. The stock set a new 6-year low earlier this year, reaching as low as $21.50. If a stock has ever been out of favor, Hewlett Packard is it. HP shares also seem to be forming a base around the $25 area.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
