Running the Numbers: Hewlett-Packard Looks Cheap

Hewlett-Packard (HPQ) has traded between $39.99 and $53.48 over the last 52-weeks. We decided to run the numbers on HPQ using the Valuecruncher interactive valuation tool to form a view on the current $44.46 share price.

View the full HPQ chart at Wikinvest

HPQ Valuation

HPQ grew revenues from $79.9 billion in 2004 to $104.3 billion in 2007 – a 9.0% compound annual growth rate. Our assumptions of revenues for the next three years are $115.0 billion in 2008 growing to $135.0 billion in 2010 – a 9.3% compound annual growth rate. We have projected EBITDA margins to grow from 12.5% in 2008 to 13.0% in 2010. We have used a terminal growth rate of 3.5%. We used a terminal capital expenditure number of $4.0 billion. We have used a WACC (discount rate) of 10%.

Key assumptions as we see them are:

HPQ terminal growth rate of 3.5%. We believe this long-term growth rate could be anywhere between 3% and 4-4.5%. We have taken 3.5% as a mid-point terminal growth rate.

HPQ WACC of 10%. We believe that HPQ's WACC (discount rate) is in the 9-11% range. Again we have taken a mid-point.

Valuecruncher valuation model of HPQ with interactive assumptions

Our analysis incorporates the cash and debt on the HPQ balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$55.38 which is 24.6% above the current share price of US$44.46.

Based on our analysis, HPQ shares look cheap. Play with our assumptions – what does your analysis say?

Stock position: None.

Comments

[tinman:]

You've done it! You found a tech stock with less than 25% upside potential. You must feel very proud.

2008 Sep 13 04:30 PM