H-P still telling compelling tale


  Recent Price
  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$53.48 - $39.99

Since announcing in May that it would spend $13.9 billion to buy the ailing computer-services provider Electronic Data Systems ($25; NYSE: EDS), Hewlett-Packard ($43; NYSE: HPQ) has lost nearly the same amount in stock-market value.

While the market did not like the latest installment in H-P’s turnaround story, it has been well satisfied with earlier chapters. Given its recent run of success, the Forecasts is inclined to give H-P some time to demonstrate the wisdom of the move. Since CEO Mark Hurd took over in 2005,
H-P’s per-share profits and stock price have more than doubled. Continued growth seems likely from H-P, a Buy and Long-Term Buy.

Pros and cons
In an industry where services units create lucrative opportunities to cross-sell hardware and software, the EDS purchase, H-P’s biggest since it took over Compaq in 2002, makes strategic sense. But, skeptics argue, EDS has been trying to rejuvenate itself since 2001 without success.

Still, assuming Hurd can integrate EDS with the same efficiency seen in his implementation of cost-cutting measures, the deal should not only increase the size of the services unit but also spark growth at H-P’s other businesses. With very little overlap between customers of EDS and H-P, opportunities to introduce products and services to new buyers abound.

The combination of EDS and H-P’s existing services division should roughly double segment sales to more than 30% of total company revenue. The combined company would control roughly 7% of the global market for technology services, behind only IBM’s ($124; NYSE: IBM) 10% share.

Business breakdown
Cost cuts have helped H-P’s profit margins widen steadily over the last five years. In the wake of the EDS deal, the company expects to trim $3 billion in annual expenses from the services unit by 2010. As growth slows in the market for desktop-printing equipment, H-P’s printing unit (26% of sales, 45% share of global printer market) plans to expand into commercial printing.

H-P is No. 1 in more than printers. The personal-systems unit (36% of sales) controls nearly one-fifth of the global market for personal computers. Revenue rose 20% in the six months ended April. Economic weakness has reduced demand for computer servers and storage (17% of sales), but the unit still managed 6% revenue growth in the six-month period with higher profit margins.

Both geographic and end-market diversification should partially insulate H-P from weakness in segments of the U.S. economy. More than 65% of revenue comes from outside the U.S., while H-P generates about one-third of its sales from each of three groups — consumers, small and medium-sized businesses, and large corporations.

At 11 times estimated year-ahead earnings, H-P trades below its five-year average forward P/E ratio of 14. Consensus estimates project 22% growth in per-share earnings for fiscal 2008 ending October and 12% growth in fiscal 2009. An annual report for Hewlett-Packard Co. is available at 3000 Hanover St., Palo Alto, CA, 94304; (650) 857-1501; www.hp.com.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com