Seeking Alpha

Joseph Harry's  Instablog

Joseph Harry
Send Message
I write for Seeking Alpha to transfer the investment ideas and concepts cluttered in my head onto paper. Follow me on Twitter @JosephHarry87 Add me on LinkedIn: www.linkedin.com/pub/joe-harry/44/435/906/ ***Disclaimer: Articles I write for Seeking Alpha represent my own personal opinion and... More
View Joseph Harry's Instablogs on:
  • Hewlett-Packard: Double The Value?

    Hewlett-Packard (NASDAQ: HPQ) before Meg Whitman was a dying company with a messy balance sheet. Since her appointment as CEO, Whitman has made terrific strides in her attempt to turn around HP. It now has some exciting opportunities ahead, and shares are cheap.

    Whitman's clean-up and shareholder returns
    HP now sits on $5.9 billion of net operating cash, a significant improvement since its CEO took over, who inherited roughly $12 billion in net operating debt. For fiscal year 2014, the company also generated healthy free cash flow of $9.3 billion.

    The company is also becoming increasingly shareholder friendly, returning almost $4 billion to shareholders through a cocktail of dividends and share repurchases.

    HPQ Dividend Chart

    HPQ Dividend data by YCharts

    HP's annualized dividend growth over the last 3 years has been an impressive 21%, with the last double-digit increase coming in at roughly 10%. Despite its lowly 1.70% yield, the company's payout ratio sits at only around 24%, so there appears to be ample wiggle room for further increases.

    HPQ Average Diluted Shares Outstanding (Quarterly) Chart

    HPQ Average Diluted Shares Outstanding (Quarterly) data by YCharts

    While it didn't keep its promise of returning half of free-cash-flow to shareholders for this fiscal year, HP still did right by shareholders for 2014 in my opinion.

    Its CFO Cathie Lesjak also said during the recent conference call that HP intends to "make up the difference in fiscal 2015." The company projects an estimated $6.5 to $7 billion in FCF for the current year. Lesjak also indicated that shareholder returns for 2015 are likely to continue to be weighted more towards share buybacks than dividends.

    Beyond just the shareholders
    While some of HP's recent share price-related success has likely stemmed in part from cost-cutting (including billions in "labor savings"), the company is also investing in its future. Research and development spending increased 10% in 2014, and was increased across every segment -- including cloud and 3D printing. Margins also increased across every single business as well. During HP's latest conference call Meg Whitman said that:

    ...we announced exciting new products and services across our businesses and as we enter 2015, we have the strongest portfolio we've had in a decade.

    While the increase in R&D is encouraging and a step in the right direction, HP still seems to lag many of its competitors.

    HPQ R&D to Revenue (<a href=

    HPQ R&D to Revenue (NYSE:TTM) data by YCharts

    The company has evolved past just ink, PCs, and printers, however, and has some legitimate opportunities ahead of it, especially in cloud computing and 3D printing.

    Two for the price of one
    Currently on schedule to be completed by the end of fiscal 2015, HP plans to split into two separate companies. The transaction is expected to be tax-free to HP shareholders, giving them ownership over two more specialized, laser-focused companies. CEO Whitman explained that:

    This is a big and complicated separation. It is the biggest separation that's ever been done. And it's not a typical spin-off where you've got one big company spinning off a little part of the company. These are two Fortune 50 companies that as set of separation both have about $57 billion of revenue.

    Hewlett-Packard Enterprise appears to be the more attractive of the two newly proposed businesses at first glance, as it will continue to have Whitman as its CEO and will focus primarily on technology infrastructure, software, and services; as well as growth markets such as cloud, big data, security, and mobility in what HP calls the "New Style of IT."

    A future leader in 3D printing?
    The second business will be known as HP Inc, and will continue to focus on its lead in personal systems and printing markets. The company has a leading market share of around 40% in the traditional, 2D print market. This business may inevitably become a casualty to digitalization, but high margins and a dominate market share should keep it relevant for a little longer, as well as sustain the company until 3D printing technology becomes a little more "mainstream".

    Dion Weisler will be CEO, and will also have the opportunity to lead HP Inc into future growth with 3D printing. According to Gartner, the 3D printing market is expected to grow from $1.7 billion in 2011 to $6.5 billion by 2019-- and it's only natural HP should be a leader in this business. The market grew by over 100% just last year alone.

    HP is already diving into the 3D printer market, with offerings such as Sprout, a new computing platform or "blended reality" ecosystem capable of syncing a 3D scanner with Windows 8. HP also recently announced its Multi Jet Fusion technology, which is apparently ten times faster and also more affordable than products currently on the market, according to HP. Most of HP's offerings in 3D printing won't be available until 2016, however.

    While the more cloud computing-oriented company may appear more valuable at first glance, HP Inc appears to have some lucrative growth drivers up its sleeve as well.

    Valuations and fundamentals
    While HP's earnings aren't exploding with growth, remaining relatively flat, they are expected to grow this year. Shares trade at 14.51 times 2014 earnings and only about 9.2 times forward earnings. If the company meets its 2015 earnings expectations, shares look pretty cheap.

    A glaring weakness, however, is flat revenues that will need to grow for the company to sustainably gain traction in its turnaround efforts. Breaking up the current company into two may help achieve this much-needed growth in sales. The company recently missed expectations, but still reported a whopping $111.5 billion in revenues for 2014. One thing to consider as an investor, despite flat growth, is the fact that the market is currently valuing HP at only 0.64 times these sales-- so there isn't exactly a lot of optimism hiding in the share price, either.

    Shares of HP look cheap with growth or not. They will continue to be more valuable as well if Whitman's turnaround is successful and the balance sheet continues to be strengthened on top of increasing shareholder returns.

    The bottom line
    Hewlett-Packard is more than a standard turnaround play. It's also a fine example of a classic value play. The challenges going forward, in my opinion, will be growing revenues and earnings to keep pace with the significant increase in share price that was seen this year.

    Pre-split the company's shares look cheap, especially considering the drastic improvements to its business fundamentals and shareholder returns under CEO Meg Whitman. Post-split shareholders will own two world class businesses with opportunities to stay relevant going forward.

    If HP can continue to capitalize on enterprise under Whitman and establish itself as a leader in 3D printing under Weisler, shares might offer double the value at current levels. I am seriously considering layering into HP at this time, and will likely add shares on any dips.

    Tags: HPQ, long-ideas
    Dec 14 12:33 PM | Link | Comment!
  • Apple: A Cheap Stock With Solid Potential

    There's a lot to like about Apple (NASDAQ:AAPL) at current levels. For starters, it's incredibly strong financially.

    AAPL Cash and Equivalents (Quarterly) Chart

    AAPL Cash and Equivalents (Quarterly) data by YCharts

    Another positive is how shareholder friendly the company is becoming. Apple plans on spending about $60 billion on share repurchases by 2015, and its increasing dividend has immense upside. It's payout ratio is also very low, even after the last increase of 15%.

    AAPL Dividend Chart

    AAPL Dividend data by YCharts

    Apple's buyback is especially significant now. Nobody wants to see the stereotypical plan put in place where the company decides to start buying back its shares at overvalued prices or all-time highs. Apple is buying itself cheap, and doing it on a massive scale.

    But at what price?

    A good question to ask when considering buying any company. What makes shares of Apple cheap?

     P/EForward P/EDiv (Yield)
    AAPL13.2111.0212.20 (2.30%)
    MSFT14.1712.961.12 (3.00%)
    GOOG28.1319.82n/a

    Data from Yahoo Finance 11/15/2013

    When compared to its peers, Apple is cheapest in relation to earnings-- both now and going forward. Microsoft (NASDAQ:MSFT) might offer a higher yield, but Apple's dividend will continue to grow rapidly as well. Apple is the largest company on the market by capitalization, has one of the strongest balance sheets, and is becoming incredibly shareholder friendly. I don't think the discount is warranted personally.

    Future growth potential-- especially in China

    Besides looking at its current valuations, looking at where Apple is heading is just as important.

    source: Apple

    Apple still derives about half of its sales (revenues above are in millions) from the iPhone. The U.S. also remains as the company's largest market. Growing sales in China could be lucrative, however, especially since it is the world's largest market for smartphones.

    A deal with the country's largest carrier, China Mobile (NYSE:CHL), would inject a large shot of growth into Apple's iPhone sales in China. A deal between the two companies has been rumored for awhile, with many speculating it to take place sometime in 2014.

    Gartner thinks that Apple could double its smartphone marketshare in China in a one year period if a deal is done. 63% of China's 1.19 billion wireless accounts belong to China Mobile.

    Both new iPhone models now support all 13 LTE bands, including the ones needed to work on China Mobile's network, which wasn't the case with the older models. The chairman of China Mobile also indicated back in August that the two companies were getting closer to a deal.

    The iPhone 5s and its implications for the future

    The iPhone 5s might not seem that radically different and innovative to the average consumer, but there are a few features inside it that could be leading towards bigger things down the road.

    1. The first is the A7, which is a custom-designed 64-bit system on a chip (SoC). The 5s became the first smartphone ever to implement a 64-bit ARM CPU with its A7. This could be a quiet step leading up to Apple's next move-- creating a unified and converged operating system that can flawlessly transition between smartphone, tablet, and PC. Mark Shuttleworth of Canonical seems to feel this way too. He said that "When Apple announced the iPhone 5s, it called the processor "desktop-class," and I don't think that was an accident -- it was sending what we think is a very clear signal that it will converge the iPhone and the MacBook Air." This is why the A7 in the iPhone and the new iPads might be leading into a larger long-term plan.
    2. The second is the iBeacon and its use for mobile-commerce. Some were disappointed that the new iPhones didn't have NFC technology integrated into them, but Apple seems to be betting (along with PayPal) on Bluetooth Low Energy, or BLE, for its m-commerce solution of the future. BLE was specifically designed to consume smaller amounts of energy to conserve smartphone battery life, which makes it more practical than NFC, and can be used to transmit data between devices and sensors embedded in physical locations. Besides just m-commerce, the iBeacon may also be setting Apple up to take advantage of the Internet of Everything as well.

    Diversifying with new revenue streams

    While Apple is primarily known as a hardware company, its iTunes software is an instrumental part of its ecosystem. It also grew by 22%, producing $15 billion in sales for Apple's recently ended fiscal year.

    There are about 575 million iTunes users around the world, and Apple is looking to transition many of these users to its newly launched iTunes Radio service. Touted as a "Pandora (NYSE:P) Killer", iTunes Radio grabbed 20 million users in its first five weeks, according to Apple.

    Pew Research Center says that an estimated 38% of American listen to audio on digital devices weekly, and this is a number that the firm estimates will double by 2015. The money to be made from this will come from advertising, which Apple should find lucrative once it opens up to ad partners.

    In August, the company seemed to have already attracted some big brand name companies for ads-- including Pepsi (NYSE:PEP) and Coca-Cola (NYSE:KO)-- who will have ads running starting in January of 2014. While iTunes Radio revenues will likely be just a small drop in a vast ocean that is Apple's overall sales, its a nice revenue stream to set up for the future. It also adds some more "stickiness" to the overall Apple ecosystem, which is one of the main assets that separates Apple from the average hardware company.

    The bottom line

    As someone who likes to look at worse-case scenarios, the worst I see for Apple going forward is a range-bound purgatory-- one where I can collect a sustainable, safe, and rapidly increasing stream of dividends. That's not so bad for a worse case scenario, and bond-like stocks serve a purpose in any portfolio.

    That's the worst-case scenario, but realistically I think Apple has room to run. Apple has a lot of exciting possibilities opening up for the future, and it also has a lot of potential for continued growth. Maybe not as much as Google (NASDAQ:GOOG) or other high-growth stocks, but definitely enough to command a higher multiple. Especially if and when it gets a deal done with China Mobile. Now looks like a good time to start accumulating shares of Apple.

    Disclosure: I am long MSFT, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I may initiate a long position in AAPL over the next 72 hours.

    Tags: AAPL, long-ideas
    Nov 18 10:11 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

  • $GILD is now trading in the single digits on a forward p/e basis.... am I missing something? Price war or not, that's ridiculous
    Feb 4, 2015
  • Back into $CSCO at $27.04
    Jan 27, 2015
  • Long $MET at $49.56: http://seekingalpha.com/a/1oc1h
    Jan 23, 2015
More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.