Is Hewlett-Packard (NYSE: HPQ) worth 60% more than it's selling for? According to Citigroup (NYSE: C), it is. Earlier this week, the megabanker examined HP's fiscal Q4 earnings release and declared that this $43 stock was worth $70 if it was worth a dime.

Citi already thought HP was a buy, of course. It's just that now, Citi's doubly sure. According to Citi, HP's moving beyond PCs and printer ink. Its server sales are competing strongly with IBM (NYSE: IBM) and Dell (Nasdaq: DELL), and HP's also starting to steal market share from Cisco (Nasdaq: CSCO) in switches.

Citing the stock's 12-times-earnings valuation, and calling this a "discount" to other large-cap tech names -- IBM costs 13 times earnings, for example, while Dell sports a P/E ratio of 17 and Apple (Nasdaq: AAPL) will run you 20 times -- Citi believes HP's multiple will expand as earnings improve. It expects HP to ultimately produce $6 in profit in fiscal 2012.

And I say: Bunk.

Oh, I'm not disagreeing with the central points Citi makes. I just don't agree that this good news adds up to a buy thesis for HP, and certainly not one that envisions a 60%-plus rise in the stock price. Why not? Mainly, because I just don't see the same improvements that everyone else seems to feel was reflected in Monday's earnings release.

Sure, the company "beat estimates." Sales growth of 8% and earnings growth of 4% were, while nothing to cheer about, at least, "growth." Better growth than most investors expected, actually. But guess what didn't grow? Guess what actually declined in Q4: Free cash flow.

The best kind of profits
Earlier this week, I criticized Wedbush Morgan for urging investors to buy HP ahead of earnings. I argued that whatever news HP announc ed Monday, it wouldn't change the fact that the shares were already fairly valued from a P/E perspective. That they were even, arguably, a bit overvalued, inasmuch as HP's GAAP profits overstate true free cash flow.

Actually, HP's news did change that analysis a bit, and not in a good way. Before this week, we saw HP as a company earning $8.6 billion annually, but generating only $8.4 billion in free cash flow. Now that earnings are out, we know the company claims to have earned more ($8.8 billion) but actually generated less cash ($7.8 billion) in the past 12 months.

I'll say that again: Since last year, earnings grew 4%. Free cash flow declined 7%. Citi may think that's a trend that will generate 60% stock profits for investors. I disagree.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he was recently ranked No. 610 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Apple is a Motley Fool Stock Advisor pick. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of Apple and IBM.

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