The economy is slow, personal computer sales are down, many investors are afraid to buy and hold stocks, the European debt crisis could create a contagion effect, and on and on. There are plenty of reasons to stay out of this market, and there were plenty of reasons to avoid Hewlett-Packard (HPQ) shares at higher levels, but at current levels investors should reconsider.
Hewlett-Packard might make the top 10 list for most-unloved tech stocks, but the level of pessimism and disdain for any company that makes PCs or doesn't participate in the Apple (AAPL) supply-chain, seems to have reached unreasonable levels. There is no doubt the company is seeing slow growth in some segments and that the company has made management errors in the past. However, there are signs that the stock could be trying to bottom-out around $19 per share, and it could be poised for better days. With expectations at very low levels, just a small amount of good news could send the share sharply higher. Here are a few reasons why accumulating this stock on dips could lead to solid gains, sooner or later:
1. Hewlett-Packard might be best known to most investors and consumers as a PC maker, however, the company is also a leader in printers, printer cartridges, IT consulting, cloud solutions, cloud security, and more. Since this company runs a number of distinctly different divisions, it could determine that a breakup or a spin-off of one or more divisions is the best way to unlock shareholder value. The company had considered spinning off the PC division as early as last year, but those plans changed, at least for now. That doesn't mean it won't happen in the future as pressures mount from shareholders for bolder action by management and a higher stock price. In addition, Hewlett-Packard has a history of spinoffs in the past. Agilent Technologies was one of the biggest IPOs in Silicon Valley when it was spun-out of this company in 1999. Furthermore, as more companies and shareholders are discontented with low valuations due to generally low stock prices, a trend for break-ups and spin-offs could just be getting started. News Corporation (NWS) shares recently surged after the company said it would split into two separate units. The low value of Hewlett-Packard shares makes a spin-off more likely and since the company has divisions that are growing at different rates, it makes sense to separate the company.
2. Some of the recent weakness in PC sales could be related to Microsoft's highly anticipated launch of an all-new "Windows 8" operating system. Just as carmakers see sales slow when consumers know a newly designed version of a car model is coming, many consumers and businesses are likely to have delayed buying a new PC until after the launch of Windows 8. This could mean the coming quarters will see higher-than-expected sales of PCs, especially when the back-to-school and holiday sales season occurs.
3. Hewlett-Packard shares look undervalued when you consider almost any valuation metric. The stock trades for about 5 times earnings, while the average stock in the S&P 500 Index trades for about 13 times earnings. It also trades close to book value, which is around $19.80 per share. It also pays a solid dividend, yielding almost 3%.
4. Not long ago Microsoft (MSFT) shares were not getting much respect from some investors but as that stock shows, investor perceptions can change and send valuations higher. Hewlett-Packard shares trade near book value whereas Microsoft trades at nearly 4 times book value, which is around $8.17 per share. Hewlett-Packard is expected to earn about $1 more per share for both 2012 and 2013, than Microsoft, and yet you can buy the shares for about $10 less!
All these factors make Hewlett-Packard a stock to consider buying on valuation and for breakup potential.
Key Data Points For Hewlett-Packard From Yahoo Finance:
- Current Share Price: $19.69
- 52-Week Range: $19.02 to $37.70
- Dividend: 53 cents which provides a yield of 2.7%
- 2012 Earnings Estimate: $4.07 per share
- 2013 Earnings Estimate: $4.40 per share
- P/E Ratio: about 5 times earnings
Key Data Points For Microsoft From Yahoo Finance:
- Current Share Price: $29.30
- 52-Week Range: $23.79 to $32.95
- Dividend: 80 cents per share which yields 2.7%
- 2012 Earnings Estimate: $2.68 per share
- 2013 Earnings Estimate: $3.08 per share
- P/E Ratio: about 11 times earnings
Data sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long HPQ.
