Hewlett-Packard (NYSE:HPQ) is the world's largest technology company and, while the vast majority of people will only associate them with personal computing, they are also involved in enterprise services (for example cloud and information management) and software (were they serve almost the entire Fortune 100 companies).
From time to time, great companies suffer and have to restructure and readjust to the rapidly evolving markets and, with technology, change comes really fast. With HP having devalued almost 46% this year, maybe this could be an interesting opportunity.
Before we look at the numbers, we should not forget that financial analysis only makes sense if we use it as a tool to help us with our decision making. First, we should build our own opinion about what the company sells, and only then try to predict where they will be in the long-term and decide if the numbers are attractive. At this point, I will assume that you have built your own opinion about HP as a company, but have doubts about the current valuation and if it's a good price to invest.
In its last analyst meeting, the CFO provided the financial outlook for 2013, where she expects non-GAAP earnings per share to be in the range of $3,40 to $3,60. If the company manages to deliver those numbers, it would mean that currently you would be paying 4,11 (14/3.40) times earnings, a very attractive valuation for a company in the position of HP.
Let's check the latest numbers to see if there are any red flags:
|Q3 2012||Q3 2011|
|- GAAP net revenue (billions)||$29,7||$31,2|
|- GAAP net earnings (billions)||($8.9)||$1.9|
|- Non-GAAP net earnings (billions)||$2.0||$2.3|
|- Operating cash-flow (billions)||$2.8|
|- Shares repurchased (millions)||16.5|
|- Cash and equivalents (billions)||$9.9|
|- Goodwill (billions)||$44.7|
While a first look at the numbers might suggest that something is going terribly wrong at the company, there aren't any real signs for concern, aside from a slight fall in revenue. The $8.9 billion loss is related to extraordinary events, mostly impairments and restructuring charges. Remember that HP is in the middle of a multi-year turnaround program and these extraordinary events are normal. If we put them aside, the company continues to produce decent earnings, operating cash-flow, and is still repurchasing shares and paying dividends.
With a market cap of $27.3 billion, even if we go to the extreme of assuming that the goodwill should be zero and accordingly assume a $44.7 billion charge, a year after that event the company would have generated almost $7 billion in net income (expected EPS of $3.4 x number of shares). This is where you should focus.
The current market cap indicates a lot of pessimism that apparently is unjustified unless something terribly wrong is coming at the operational level. It's difficult to predict the long-term future of technology companies but at current prices Hewlett-Packard is looking very attractive.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HPQ over the next 72 hours. 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.