At Multi-Year Highs, Is the Hewlett-Packard Company a Buy?

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The alleged turnaround of struggling computer giant Hewlett-Packard (NYSE: HPQ  ) was one of the biggest stories in tech over the last year, as investors cheered the company's efforts and sent the stock on an impressive rally. Now, trading at levels last seen in 2011, some are beginning to wonder whether the stock's performance is backed by its fundamentals. Commentators seem divided on the issue, some believing that the turnaround will gain traction, and others maintaining that the numbers have been disappointing.

Recent performance: dubious
The company's performance over the last few years doesn't exactly scream "buy." Since Meg Whitman took over, at the end of 2011, things haven't improved meaningfully, with sales declining in the company's core areas. So lets just focus on revenue figures here, as the company's full-year earnings-per-share numbers have been choppy to say the least, in part due to the Autonomy fiasco.

For full-year 2012, the first year of Meg Whitman's five-year turnaround plan, net revenue declined 5% to $120.4 billion. In 2013, full-year revenue dipped again, this time by 7% falling to $112.3 billion, currency effects accounting for around 2%. By segment, the business doesn't look too healthy either. I don't think anyone was expecting much from the company's PC or printing businesses, as the market for both categories have been in decline and margins are generally low.

The enterprise segment was down by 5% in 2012 and 2013, although a 1% increase is projected for 2014. This one is worth watching, as it is potentially one of HP's most lucrative growth segments. Things aren't expected to get much better for the services segment, down 8% in 2013, and is projected to fall by another 5% through 2014. Software is up by about $300 million between 2010 and 2013, but this pales in comparison to the $15 billion Whitman has spent on software-related acquisitions. So, no huge improvement so far.

Possible catalysts going forward
Optimism surrounding HP's hardware segment was boosted by a better than expected performance in its first quarter of 2014. HP is looking to revitalize its fading PC business by getting back into the tablet market, a move which was well received by analysts. HP seems to be targeting the enterprise tablet market, with high-spec tablets running Microsoft's (NASDAQ: MSFT  ) Windows 8.1 platform.

Windows tablets are expected to reach a market share of 10.2% by the end of 2014, up from around 3.4% currently . The expected increase can partly be attributed to a Windows 8.1 licensing fee cut, although this will only affect devices costing under $250 and is as such not of much use to the enterprise market, which generally consists of high-quality tablets. In general, Windows 8 has a fairly small footprint in the enterprise arena, although any increased market share among consumers should be seen benefiting HP.

Another area in which HP made waves recently is a rather mysterious announcement regarding 3D printing, news which sent 3D printing pioneers such as 3D Systems (NYSE: DDD  ) and Stratasys (NASDAQ: SSYS  )  tumbling. Whitman stated that the company would have a large 3D printing announcement by June this year, hinting that it would be able to significantly increase both the speed and the quality of 3D printing. Initially, HP's foray into actual 3D printers will focus on the business side of things. 3D printing stocks have been under fire recently due some poor results coming out of the industry.

However, some analysts believe that HP entering the market will be a boon to 3D Systems and Stratasys rather than a threat, arguing that it might break open the market by increasing the viability and credibility of the industry. With plenty of cash to throw at the foray, HP might be able to help the market mature more quickly.

The bottom line
Currently, Hewlett-Packard's prospects look somewhat murky. On the one hand, the turnaround, so touted in the financial media, doesn't seem to be materializing on paper. On the other hand, HP does have a number of promising avenues for growth, which may allow for some further upside in the coming year.

As such, you would be wise to check on the sales of the company's core segments, with hardware possibly getting a boost from tablet sales and the enterprise segment probably posting a small sales increase this year.

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  • Report this Comment On March 25, 2014, at 2:23 AM, Lazerator wrote:

    I keep reading that HP is at "multi-year highs" as if that really matters looking forward. The stock still isn't back to where it was in late 2011 when Apotheker was fired, nor even close to the $54 just before Hurd was fired. The stock took a hit on both events, and bottomed in 2012 after the company wrote off bad acquisitions by Hurd and Apotheker. This was several billions of dollars of goodwill, a non-cash charge to earnings. It was the resulting RARE loss that took the stock to the $11 level.

    So it's bounced back to $31 in the past two years. That's a great gain, but the forward P/E is barely 8.5 based on analysts and the company's EPS expectations. Cash flow is phenomenal. Debt has been paid down considerably, the dividend was just increased, ongoing buybacks have reduced the outstanding shares, and earnings estimates for 2014 have been raised.

    So while everyone obsesses about the recent gains, they fail to recognize that the stock is still undervalued and there is significant upside. HP should easily support a 12-15 P/E ratio, and at $3.71 EPS for FY 2014 you do the math.

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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