Hewlett-Packard Deserves the Applause

Tech is everywhere. It needs to be here.

I'm typing today's column on a Logitech (Nasdaq: LOGI  ) keyboard, as bits fly through the microcircuitry of my Dell (Nasdaq: DELL  ) desktop. Microsoft (Nasdaq: MSFT  ) makes the software that translates my thoughts into typeface. Yet one tech name is notably absent from the gaggle of gadgets striving for pride of place on my desk: Hewlett-Packard (NYSE: HPQ  ) . (Note: HP competes with Logitech and Microsoft in the computer peripherals market, and with Dell in the PC industry.)

But the wife has been asking me to purchase one of their laptops, and I must admit -- after reading last night's earnings report, not only am I going to tell her "yes," but I might also buy a few HP shares as well.

Simply irresistible
Pull your cassettes out of storage and cue up the Robert Palmer soundtrack. In Monday's Foolish Forecast, I painted HP as a steadily improving company showing no signs of slowing down. Yesterday's news confirmed this. In fiscal Q3 2008, HP triumphed in every manner imaginable:

  • Sales grew 10% to $28 billion year over year, headlined by double-digit expansion in the Europe, Middle East, and Africa (EMEA) and Asia Pacific regions; Brazil, Russia, India, and China (BRIC) growth in particular exploded 24% upward.
  • Operating margins tacked on about 70 basis points.
  • Between those two factors, profits soared 21% to $0.80 per share; $0.86 non-GAAP.

And this was just the beginning. HP also did a masterful job of managing its working capital, holding inventories to just 2% growth, and more than doubling free cash flow to $2.7 billion.

Resistance is futile
Fools, this was about as close to a perfect earnings report as any I've read. The only apparent flaw was HP's buyback program. The company spent $1.6 billion to buy back 34 million shares in Q3. That works out to $47.06 per stub -- for shares worth less than $46 today.

At first glance, it doesn't look like a smart way to spend cash. But here's the thing: HP is smarter than the investors who ditched its stock on news of the EDS (NYSE: EDS  ) merger.

I've been saying for months that HP was cheap. It still is. The company generated $12.1 billion in free cash flow over the past 12 months, meaning it sells for less than 9 times FCF today. You don't need Apple's (Nasdaq: AAPL  ) 25% growth rate to make that a bargain. HP's 13% will do just fine.

Foolish takeaway
Consistent performance plus a compelling price makes Hewlett-Packard an irresistible bargain.

Related Foolishness:

Fool contributor Rich Smith does not own shares of any company named above. Both Microsoft and Dell are Motley Fool Inside Value selections. Apple is a Motley Fool Stock Advisor pick. Explore the portfolio-boosting goodness of any of the Fool's newsletters free for 30 days. Get your free refresher course in The Motley Fool's disclosure policy right here.


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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 August 20, 2008, at 2:59 PM, truparad0x wrote:

    HP may make money, and it might be a great investment, but Google "HP Sucks" and you can tell where they save money on. Customer service and tech support is horrendous.

  • Report this Comment On August 20, 2008, at 3:50 PM, twentyheigt wrote:

    Apple is not a bargain... 25 % growth and...33 PE due to have sold products in inflated price bought on credit before the current credit crisis.

  • Report this Comment On August 20, 2008, at 6:11 PM, abbeymoney wrote:

    I have had great experiences with HP support. They have been helpful resolving issues that were not necessarily hardware related.

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