Hewlett-Packard: From A Garage To The Top Of The World, But Is It Worth An Investment?

Jun.13.12 | About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) is an American multinational company, primarily engaged in the information technology sector. It was founded in a garage in Palo Alto by Bill Hewlett and Dave Packard in 1939. The company sells a variety of products ranging from data storage to cameras. It is also the world's leading PC manufacturer. Its main competitors include IBM (NYSE:IBM) and Dell (NASDAQ:DELL).

As of 2011, Hewlett-Packard had total assets of $129.51 billion, and a total equity of $38.62 billion. It recorded annual revenue of $127.24 billion, as well as an operating income of $9.67 billion, and a net income of $7.07 billion.

To Invest Or Not To Invest That Is The Question

Hewlett-Packard has one of the strongest brands in the world. According to Millward Brown BrandZ Survey, Hewlett-Packard's brand is the 26th highest in the world with a value of $22.898 billion. Hewlett-Packard also has one of the most loyal consumer bases. Its customers, particularly in the PC industry, are devoted customers who keep on coming back for the next Hewlett-Packard product. Hewlett-Packard's line of personal computers is particularly attractive for certain customers because they have better graphics processors and are more useful in the gaming world than Apple's (NASDAQ:AAPL) computers.

Hewlett-Packard benefits from having a diverse product range. On a global scale, it finds economies of scale from producing different products while consolidating the production. Recently, in March, Hewlett-Packard announced that it was consolidating in order to achieve cost saving measures. It merged a variety of different business units with each other so that there could be uniform branding, better management of the supply chain, better customer service, and a more efficient marketing strategy. This has allowed Hewlett-Packard to cut out the fat so to speak and become more cost effective.

It also marks a change for the better in how Hewlett-Packard conducts business as it is simplifying what was previously a complex organisation. This will allow Hewlett-Packard to garner more value out of its production line and utilize its resources better. Hewlett-Packard's many different devices also complement each other. They act in tandem with each other, for example, an Hewlett-Packard Printer usually works better with a Hewlett-Packard computer than one of Apple's Macs.

Hewlett-Packard's personal computing business should not be focused on. Its loss of market share to Apple and other computing giants has been highlighted in the press, however, this is largely irrelevant to Hewlett-Packard's future. The companies which benefit most from personal computers are companies which produce the components and the software, companies like Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). Therefore, the printer side of Hewlett-Packard is perhaps more important to the company's future.

Hewlett-Packard makes a large stream of revenue from ink sales. Similarly, to how razor companies profit most off sales of razor blades, Hewlett-Packard profits hugely off its ink sales. Although analysts have been suggesting that HP's printing business may go the way that Kodak did after the rise of digital cameras, Hewlett-Packard is doing well to counter its recent loses in sales. It is shifting its production to more high end printing where the money is. This includes commercial printing and multi-function printers.

Data storage, which makes up around 15% of sales, is another area which has benefited Hewlett-Packard in the past. HP has a strong position in the data storage market - which it can use to push new products out and capitalize on them to turn a healthy profit. However, Hewlett-Packard is facing stern competition in this market.

Hewlett-Packard's recent lawsuit against Oracle (NYSE:ORCL) proves that Hewlett-Packard is now in competition with Oracle and not partners - which might pose a problem in the future. There is a strong debate over who will win the court case. Hewlett-Packard is expected to lose billions in sales revenue by 2020 if Oracle wins. Oracle is also waging quite an effective PR campaign against Hewlett-Packard. However, this is not likely to effect the final court decision and if you take the time to examine the facts of the case, it seems that Oracle might well have violated their part of the deal with Hewlett-Packard. Therefore, my money's on Hewlett-Packard.

Conclusion

Hewlett-Packard obviously faces some huge threats from major corporations, and has $30 billion worth of debt. It is also facing increasing competition in many of the sectors it operates in. However, the company is focusing on becoming more profitable and revamping much of its organizational structure. It also has $8.100 billion free cash flow and a net income of $7.074 billion.

Therefore, I believe Hewlett-Packard can manage its debt well, while turning the company around. Morningstar rates its fair value as $40.00 per share and gives it a five star rating; however, The Motley Fool only gives it three stars. Nonetheless, users of The Motley Fool, including Wall Street Analysts, for the most part, believe it will outperform the market. Consequently, I believe Hewlett-Packard is cheap at $22.31 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.