Diversification Pays Off For H-P

9/14/2009


  Recent Price
$45
  Dividend
$0.32
  Yield

0.7%

  P/E Ratio
12
  Shares (millions)
2,436
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$49.20 - $25.39

For a company that chose its name via a coin toss, Hewlett-Packard ($45; HPQ) takes a deliberate approach to dealing with trouble. H-P’s founders designed their first factory so it could be turned into a grocery store if the technology business failed to grow.

That pragmatic culture has in many ways persisted, leaving H-P better positioned than most when the recession hit. The shares have dipped only 1% in the past year compared to 4% for the S&P 1500 Technology Sector Index and a 19% swoon for the broader S&P 1500.

H-P finds safety in diversification. While controlling the biggest slice of the global personal-computer (PC) market, H-P also ranks second in computer servers designed for large businesses and is gaining share. With a reasonable valuation, solid growth potential, and rising earnings estimates, Hewlett-Packard is a Buy and Long-Term Buy.

H-P’s spread offense

None of H-P’s six business segments accounts for more than a third of sales. H-P Services (29% of 12-month sales) provides a variety of technology and outsourcing services. The $13.9 billion acquisition of Electronic Data Systems in August 2008 nearly doubled the segment’s sales. The EDS business features annuity-like revenue streams, and the acquisition reduced H-P’s reliance on more-cyclical units.

Rising demand for affordable netbook computers accounts for much of the growth in personal systems (31% of sales). However, this market is plagued by falling prices, in part because of stiff competition. In the July quarter, H-P sold 19% more notebook computers than it did in the year-earlier period, yet revenue from notebooks fell 10%. Growth in China and stabilization in the U.S. helped limit revenue declines in the quarter.

Other segments include imaging and printing (21% of sales), servers and storage (14%), software (3%), and financial services (2%).

H-P also diversifies geographically. More than 60% of revenue comes from outside the U.S., yet no foreign country accounts for more than 10% of sales. H-P holds the top spot in India with a 17.8% share of the PC market, including a 30.9% share for notebooks. Performance in China and other emerging markets was strong in the July quarter, offsetting weakness in Europe.

Conclusion

H-P’s cautious approach carries over to its balance sheet, which boasts cash of $13.59 billion, or $5.58 per share. Long-term debt doubled over the past year, mostly to fund the EDS acquisition, yet still represents just 25% of total capital. H-P has enough cash to pay off nearly 98% of its long-term debt. The company also generates excellent cash flow, sharing some of that cash with investors via stock buybacks that have lowered the share count by 14% over the past three years.

At 12 times trailing earnings, H-P trades at a 21% discount to its three-year average valuation and looks cheaper than other U.S. computer giants. Wall Street sees per-share profits rising 5% to $3.81 in fiscal 2009 ending October, followed by an 11% jump to $4.22 in fiscal 2010. Both estimates have climbed over the past month. An annual report for Hewlett-Packard Co. is available at 3000 Hanover St., Palo Alto, CA, 94304; (650) 857-1501; www.hp.com.

 

HEWLETT-PACKARD
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jul '09 $0.91 vs. $0.86 - 2% $43.55 -

$33.40

12 - 9
Apr '09 0.86 vs. 0.80 - 3% 37.40 - 25.39 10 - 7
Jan '09 0.93 vs. 0.80 + 1% 39.53 - 28.23 11 - 8
Oct '08 1.03 vs.

0.81

+ 19% 49.20 - 30.03 15 - 9
           
Year
(Oct.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $118.36 $3.49 $0.32 $53.48
-
$30.03 15 - 9
2007 $104.29 $2.76 $0.32 53.00
-
38.15 19 - 14
2006 $91.66 $2.23 $0.32 40.10
-
27.68 18 - 12
2005 $86.70 $1.62 $0.32 29.51
-
18.50 18 - 11
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
94 75 82 77 72 92 73

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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