Foolish Forecast: Will HP Hit Pay Dirt?

My word, Hewlett-Packard (NYSE: HPQ  ) is staying busy these days. One week after announcing the $14 billion acquisition of service specialist Electronic Data Systems (NYSE: EDS  ) , HP is set to report second-quarter earnings on Tuesday night.

What Fools say:
Here's how HP's CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating (out of 5)

International Business Machines (NYSE: IBM  )

$175.2

16.6

***

Hewlett-Packard

$117.4

16.2

****

Canon (NYSE: CAJ  )

$68.0

15.5

*****

Dell (Nasdaq: DELL  )

$43.3

16.1

**

Sun Microsystems (Nasdaq: JAVA  )

$10.5

17.9

***

Data from Motley Fool CAPS and Yahoo! Finance as of May 19.

CAPS player ChannelDunlap notes that HP is the "#1 PC Manufacturer in the world, and growing. But since everything that goes up must come down (ie, they won't be #1 forever), I like the EDS deal giving them more opportunities in different markets."

On the bearish side of the fence, OnyongJun sees the EDS deal in a different light: "After draining the EDS swamp HP could find a landscape of snapping alligators capable of taking it down the drain." Ouch.

In total, we've seen two negative CAPS commentaries about the EDS deal, but 26 positive ones. I think it's safe to say that your fellow investors like the move.

What management does:
HP has an unbroken streak of 11 quarters in a row of increasing operating margins. The accelerating sales streak is a bit shorter, stopping at five quarters, but still impressive.

Margins

10/2006

1/2007

4/2007

7/2007

10/2007

1/2008

Gross

24.3%

24.4%

24.3%

24.2%

24.4%

24.5%

Operating

7.4%

7.6%

7.9%

8.2%

8.4%

8.8%

Net

6.8%

6.9%

6.6%

6.8%

7.0%

7.3%

FCF/Revenue

9.6%

7.1%

7.2%

6.0%

6.3%

9.2%

Growth (YOY)

10/2006

1/2007

4/2007

7/2007

10/2007

1/2008

Revenue

5.7%

7.0%

9.2%

11.7%

13.8%

14.4%

Earnings

158.5%

143.0%

76.9%

38.2%

17.2%

20.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
With EDS under its belt, HP is looking a lot like a carbon copy of Big Blue. You certainly could pick worse businesses to serve as a template for your own, and IT services tend to come with handsome profit margins and a nearly guaranteed eternal revenue stream.

As for this quarter, the signals are mostly positive. IBM is doing fine, and Sun somehow manages to grow without a coherent business strategy. While printer rival Canon reported a weak quarter, that owed more to a stronger yen than poor unit sales. HP swings in the other direction, and it should be helped by a weakening dollar. Expect good news, and a continued recovery from last week's acquisition-related value drop.

Dell is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find more from your fellow Fools who were quoted above!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

DocumentId: 647887, ~/Articles/ArticleHandler.aspx, 4/19/2014 1:29:19 AM

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...


Advertisement