Why I Still Have Faith In Hewlett-Packard

| About: HP Inc. (HPQ)

Their is no doubt that Hewlett-Packard (NYSE:HPQ) has its fair share of problems. The company has been performing poorly due to poor acquisitions and a lack of proper leadership. Former CEO Leo Apotheker's $10 billion acquisition of Autonomy began a downward spiral for the company. HP simply overpaid for the company, which only generated $870 million in revenue in 2010.

The stock is down more than 60% since last year. Even since Apotheker's successor, Meg Whitman took the helm, the stock is still in a downward spiral.

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While the stock is falling, investors should not be so quick to criticize Whitman this early in. It has not even been a full year since she took over. HP's problems stem from years of poor leadership and it will take time before the company experiences growth again.

Whitman's strategies seems to be gaining ground. Last October, Whitman announced that HP's initial plan to sell its PC business would be halted. Instead, Whitman decided to focus on the PC segment. While this move may seemed like a poor decision in a time when tablets were becoming the norm, Whitman was able to grab market share. A report showed that HP actually shipped more PCs in Q1 2012 than Apple (NASDAQ:AAPL). While the drop in sales for Apple may be blamed for seasonal weakness, it still shows that HP was able to handle post-holiday sales fairly well. Although Apple has surpassed HP again, that is mainly due to the release of the new iPad.

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If we compare HP to its rivals that operate Windows O/S, we can still see that HP's market share has been flat to up since 2010. This is similar to Dell (NASDAQ:DELL), but there is one big difference between the two. HP trades at a much larger discount than Dell does. HP has a forward P/E of 4.18 and a P/B of .84, while Dell has a forward P/E of 5.79 and a P/B of 2.16. Considering that both have been maintaining their share of the PC market, HP's discount to book value shows that the market is overly pessimistic.

HP is going to focus its attention on its hardware division. The division is the largest for the company. Whitman announced that it would be significantly increasing R&D for the next three years in order for the company to remain competitive.

The other problem that HP has is related to macroeconomic factors. HP saw its European server revenue fall 19 percent. IBM (NYSE:IBM) and Oracle (NASDAQ:ORCL) saw their server revenues fall 15.3% and 12.2%, respectively. However, even with declining European revenue, both IBM and Oracle have much higher valuations than HP. IBM has a forward P/E of 11.9 and a P/B of 10.85, while Oracle has a forward P/E of 10.52 and a P/B of 3.36. Now I am not saying that IBM and Oracle are expensive, but rather I am saying that HP is cheap.

HP clearly has more problems than its competitors I talked about above, but the fact is that the company still generates plenty of free cash flow. Last quarter alone, HP made $1.4 billion in FCF. In addition to this, Whitman has had a strong track record as a CEO. While there is a lot of work to be done, HP's worst days may be behind it.

HP gave a guidance for FY 2012 of a non-GAAP EPS of $4.05 - $4.10. Even if HP falls below guidance and makes $3 per share, that still places the P/E around 6. Long-term investors should consider taking a stake in HP. The market seems to be way too pessimistic on the future of the company, but with Whitman at the helm, the company could experience a strong transformation in the next two years.

Also, investors that want to purchase HP at a lower price should consider selling the November $17 puts. This is a great way to purchase the stock if it continues to fall, while locking a 5% premium.

Disclosure: I am long HPQ.

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