At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
"No respect, no respect at all ... that's the story of my life!"
You have to figure Hewlett-Packard (NYSE: HPQ) feels a lot like Rodney Dangerfield these days. I mean, the company beat Wall Street's earnings estimates last month. It just announced a 10% dividend hike, and a major corporate restructuring aimed at cutting costs. Result: Analysts at Barclays Capital sliced $2 off its price target for the stock, and over at Argus, they've just cut a whopping 25% off their best guess as to what Hewlett-Packard's worth. No respect at all.
According to Argus (which still recommends buying the shares), HP isn't worth nearly the $40 it used to think the shares should fetch. They now put the price target at $30 a stub, and Barclays thinks $25 is actually closer to the truth. But why is that?
A picture may be worth 1,000 words... but not much cash
After all, it's not like the shares look terribly expensive today to begin with. Priced at $23 and change, Hewlett-Packard currently sports only an 8.3 price-to-earnings ratio, far cheaper than the average stock in the S&P. It's cheaper than Dell (Nasdaq: DELL), cheaper than IBM (NYSE: IBM), and about half the cost (P/E-wise) of a share of Apple (Nasdaq: AAPL).
But here's the thing: Hewlett-Packard is expected to grow slower than any of these rivals. Current Wall Street estimates project less than 5% annual earnings growth at HP. That's compared to more than 10% growth at IBM and nearly 20% at Apple. (Even Dell isn't totally doomed, expected to grow at nearly 6%, or about one-third faster than HP.)
And here's the real kicker: HP may not manage even the growth it's pegged for. Why not? In making its price target tweak, Barclays explains that: "something is amiss in the inkjet printer industry and it's not just the economy. ... We believe inkjets are likely being affected by the overall weakness in PCs, which is exacerbated in the near term by HDD shortages. However, the bigger issue, in our opinion, is the rise of smartphones and tablets, which now house digital images and can act as printed pages -- consumer pages once printed by inkjets."
In other words, the same growth in smartphones and tablets that has Apple trouncing everyone else in the computer industry with 20% growth is helping to push HP even further toward the back of the pack, by depressing its ink sales. Now that everyone and his brother is toting around an Android or iPhone smartphone, no one needs to actually print out physical pictures from their digital camera anymore because chances are their camera is their phone (or tablet), and they can show you their pictures right on it.
Is HP doomed?
Keep in mind that Argus still recommends buying Hewlett-Packard, and even Barclays doesn't go so far as to counsel selling it. Still, the idea that HP depends on 70%-gross-margin ink sales to produce 20% of its annual profits, and that ink sales are slipping, doesn't exactly inspire confidence. Barclays believes that if ink sales drop 5%, this would subtract about $0.16 per share from HP's annual net income and suggests that sales could drop by as much as 10% through 2014.
In short, HP may not be "doomed" exactly. But struggling to maintain earnings growth, staggering under a debt load of nearly $23 billion, HP isn't nearly the bargain it appears to be. No, not even at eight times earnings.
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