On Thursday, I wrote an article on Cisco System's (CSCO) bonds, recommending fixed income investors look at the 2019s and that income investors look at the equity. Now I find myself writing yet another article on a technology company - Hewlett Packard (HPQ).
The motivation for this was reading the various articles written about HP on Seeking Alpha. The majority of articles written in response to the company's earnings (here, here and here) saw the decline as a value opportunity, while the majority of comments were decidedly negative on the company. The articles and the comments lead me to the question: what about the bonds?
I decided to look for an answer in the difference between HP's bonds and the bonds of Dell (DELL) and versus the communication and technology sector spreads.
First, how HP's five year debt compares to Dell's similar maturity bonds:
As the chart above shows, HP is trading near its cheapest levels versus Dell in the five year tenor.
Looking at the ten year tenor versus Dell, we see the following:
As the chart shows, in the ten year HP is near recent wide spreads versus Dell, but has more to go to hit its wide spot.
Finally, a look at the credit default swaps (CDS) of the two companies is in order:
As the above chart shows, the two technology companies CDS trades near similar levels, which implies that the market does not see a significant difference in the default probability of the two issuers. Conceptually, their bonds should trade more in-line with each other, which they obviously do not.
Communication and Technology Sector.
In addition to looking at Hewlett Packard versus their nearest peer, Dell, they should be measured versus their sector indices in order to determine if they trade out of line with their sub-index.
The comparison to the five year "BBB" rated communications and technology sector shows the following:
HP's five year debt also trades at the wide spreads versus the "BBB" rated communication and technology index.
Moving on to the ten year tenor, the comparison between HPQ ten year debt and the "A" rated communication and technology sector reveals the following:
As is shown in the chart above, HP in the ten year tenor is trading near its wide spreads versus the "A" rated communication and technology sector. This would imply value versus the sector index.
Now a comparison to the ten year "BBB" rated communication and technology sector:
As is shown in the chart above, HP in the ten year tenor is trading near its wide spreads versus the "BBB" rated communication and technology sector as well. This would imply value versus the sector index.
Bottom Line: If you want to invest in the debt of Hewlett Packard, the five year is where you want to invest as it is cheap to Dell and the sector indices.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.