Hewlett-Packard Is Seriously Mispriced And Has Upside Of 100%

Jul.12.12 | About: HP Inc. (HPQ)

Hewlett-Packard Co. (NYSE:HPQ) is a producer of computer systems in the United States. Investors who purchased Hewlett-Packard shares probably regret their decision, with its shares steadily tumbling lower and having now closed at $19.69 near its 52-week low of $19.02. As I have said before, I am always interested in having a look at stocks that trade at 52-week lows, which is a buy signal for me and, correspondingly, shy away from stocks that hit new highs as the marginal investor is often momentum driven, shaky and not in for the long haul. I believe Hewlett-Packard is facing one of these situations.

The price of Hewlett-Packard shares has been driven so low, that the stock trades at only 4.5x earnings, presenting investors a great earnings yield of 22%. Now, obviously this valuation represents some pessimism about margin developments and competitive pressure that surround the manufacturer space in general and are well publicized.

I do believe that management can implement process changes that allows for an uptick in operating margins. After all, the return on book value has still been 13% in 2011 and the company pays investors a 2.7% dividend that has good value in times of uncertainty.

Analysts estimate a 2013 average EPS of $4.4 while my own 2013 EPS based on historical average growth and same profitability and SG&A expenses is $3.90 per share. This estimate is about 10% lower than the average analyst estimate. Even with a moderate multiple of only 10x earnings, the company's intrinsic value should stand at $39, which represents about a 100% upside. Though some might be tempted to say that Hewlett-Packard's future is uncertain, this is not new information but a reality every investor is faced with. In fact, considering that Hewlett-Packard's 52-week high is $37.7, my price target of $39 per share is actually not far off this mark.

Investors who are interested in a cheap stock that faces some (solvable, in my opinion) uncertainties and who want to take advantage of a significant mispricing might consider an investment in Hewlett-Packard.

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