Hewlett-Packard: Unreceivable

After recording their best daily gain in over a year yesterday, stocks were nursing a post-rally hangover today, with the Dow (DJINDICES: ^DJI  ) and the broader S&P 500 (SNPINDEX: ^GSPC  ) losing 0.2%.

H-P: Not as cheap as it looks
(NYSE: HPQ  ) was the worst-peforming Dow component last year, down 45%. While the stock may rebound this year, one key fundamental metric -- free cash flow -- is more likely to decline. In the annual report it filed a week ago, H-P disclosed that it sold $4.3 billion of receivables in its fiscal year 2012, which ended on October 31 -- a 54% increase over the $2.8 billion it sold the prior year. That increase contributed 16% of the company's free cash flow in fiscal 2012. H-P's revenues are expected to contract over the next several years, so selling increasing amounts of receivables clearly isn't a sustainable means to increase cash flow, because it amounts to "stealing" cash flow from a future period.

Furthermore, receivables themselves have not been evolving in the right direction. Over the past five years, average days sales outstanding has increased significantly, from less than 43 days in the fiscal year 2007, to nearly 53 days in the year ended October 31(Days sales outstanding is the amount of receivables on the firm's balance sheet expressed in terms of number of days of revenue.) Increasing days sales outstanding indicates that customers are, on average, taking longer to pay their bills, which is rarely positive. It may, for example, indicate that a company is forced to offer longer payment terms to achieve its sales.

Proper working capital management used to be well-understood at H-P. David Packard discussed it in a speech entitled "Growth from Performance," which he delivered at an engineering conference in April 1957. He explained that it was one of the key factors that had enabled his company to grow at an annualized rate of 42% between 1950 and 1957 -- "accomplished... without any outside capital."

With a market value that represents just 3.7 times fiscal 2012 free cash flow, H-P looks cheap statistically; however, deep-value aficionados should be aware that the denominator looks like a poor baseline figure for the company's true earnings power.

The Motley Fool's chief investment officer has selected his number one stock for the next year. Find out which stock it is in our brand-new free report, "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2013, at 10:54 PM, CROIC wrote:

    I don't think the difference between 3.7x and 4.3x free cash flow is really going to change anyone's thesis.

  • Report this Comment On January 03, 2013, at 11:39 PM, TMFAleph1 wrote:


    Thanks for your comment.

    You're quite right, of course. I didn't mean to imply that this issue is the sole, or even necessarily the most important reason not to attribute too much weight to a cashflow multiple for H-P. It's really just illustrative of the host of problems an investor faces in trying to establish the company's earnings power.


Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2178479, ~/Articles/ArticleHandler.aspx, 3/27/2015 3:36:03 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!