There's More To H-P Than Meets The Eye

4/5/2010


  Recent Price
$53
  Dividend
$0.32
  Yield

0.6%

  P/E Ratio
15
  Shares (millions)
2,427
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$53.79 - $30.98

In its latest marketing blitz, Hewlett-Packard ($53; HPQ) wants to recast its consumer image as a company that offers more than just printers and inexpensive computers. Our Quadrix® stock-rating system certainly sees more in H-P — its attractive valuation, solid balance sheet, and long-term growth record, for instance.

Indeed, H-P’s Overall score has ranked among the top 20% of stocks in our research universe for 22 of the last 24 months. Stocks with persistently high Overall scores tend to beat the market. The stock has rallied 66% over the last year, versus 47% for the S&P 500 Index, yet still seems reasonably valued. Hewlett-Packard is a Buy and Long-Term Buy.

Business breakdown

Over the past four quarters, H-P ratcheted profit margins higher as it continued efforts to lower operating costs by $3 billion a year. During that period, free cash flow surged 20%. The company used some of those funds to reduce its share count by 2% and boost cash holdings by 21%.

H-P also likes to deploy its excess cash for takeovers. The company has shelled out tens of billions of dollars on acquisitions over the past decade, including deals for EDS and Compaq. In November, H-P agreed to pay $2.7 billion for 3Com ($8; COMS) to expand its presence in corporate data centers and computer networking.

H-P holds a 21% share of the global personal-computer market, ranking No. 1 in the world, and is the second-largest seller of technology services and servers behind IBM ($129; IBM). H-P expanded its share in both markets during the recession, although these gains could not offset the downturn in technology spending as clients held off on upgrading their systems. Sales fell in fiscal 2009 ended October, the first decline since 2001.

Now controlling a bigger slice of the technology market, H-P appears positioned for a lift once spending rebounds. For fiscal 2010, the consensus sees H-P reporting 15% higher per-share earnings on 7% revenue growth, and analyst estimates are rising. However, H-P will also face new competition for corporate spending. Cisco Systems ($27; CSCO), once a distribution partner with H-P, is pushing into data centers and video-conferencing. And Oracle ($26; ORCL) is using its acquisition of Sun Microsystems as an opportunity to leap into the server business.

H-P divides its operations into four business segments. The personal-systems unit (31% of 12-month revenue and 13% of operating income) has benefited from growth in cheap netbook computers. Imaging and printing (20%, 31%) saw revenue slide 14% in the past year but stabilize in the January quarter. Financial services (2%, 2%) generated modest sales and profit growth in the last four quarters. The company’s biggest unit, enterprise systems (45%, 55%), has also been its strongest in the past year, with revenue rising 11% and profits 26%.

Conclusion

At 15 times trailing earnings, the stock trades 6% below its five-year average. Among large hardware companies, only IBM has a lower trailing P/E ratio. 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

Jan '10 $1.10 vs. $0.93 + 8% $52.95 -

$46.80

16 - 14
Oct '09 0.99 vs. 0.84 - 8% 49.20 - 42.14 16 - 13
Jul '09 0.69 vs. 0.80 - 2% 43.55 - 33.40 13 - 10
Apr '09 0.71 vs.

0.80

- 3% 37.40 - 25.39 11 - 8
           
Year
(Oct.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $114.55 $3.32 $0.32 $49.20
-
$25.39 15 - 8
2008 $118.36 $3.25 $0.32 53.48
-
30.03 16 - 9
2007 $104.29 $2.68 $0.32 53.00
-
38.15 20 - 14
2006 $91.66 $2.03 $0.32 40.10
-
27.68 20 - 14
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 80 84 79 69 70 47

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


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