Remaining Cautious on Hewlett-Packard
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It hasn’t been a very good year for Hewlett-Packard (NYSE: HPQ), at all. In the last twelve months the stock price has tumbled over 40%, which is partly a reflection of poor earnings, and partly due to the company’s reduced outlook. Since CEO Mark Hurd’s departure in 2010, things have gone from bad to worse for the computer giant, which is now facing a large-scale restructuring which it hopes will turn the company around to profitability once again. Still, the stock is historically cheap at the moment, which raises the question whether or not there is currently value to be found in the stock.
Indeed, looking at fundamental valuations, the stock looks very cheap right now. The stock trades at a historically low 3.5x TTM earnings compared to the 15.9x industry average. The price to book is also very attractive at around 0.91. For comparison, HP’s closest competitor, Dell (NASDAQ: DELL), trades at a similarly low 5.75x earnings but a price to book of around 1.7. HP has a very decent return on equity of 17.8% and an operating margin of 9%. While the stock looks very cheap at the moment, I think it may be more of a value trap than a true value play at the moment.
While HP is a well-diversified company with activities in a number of different segments, they are under fire from the likes of Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) due to the increasing popularity of tablets over the traditional market of PC’s and notebooks. Also, the printing segment in which HP has traditionally been very strong may be losing its importance as smartphones continue to penetrate the consumer market. The company’s recent warning on analyst day does little to inspire confidence in the future.
HP’s 2013 outlook, presented on Friday, is downbeat. Partly this is a result of the restructuring plans for the fiscal year, which according to CEO Meg Whitman will be a transition period for the firm. Taking restructuring costs into account, 2013 EPS is seen $0.60-$0.80 lower than consensus. This reflects weakness in several divisions, most notably in PC’s and laptops. The printing and enterprise divisions seem to be doing a little better, but are also facing a steady decline. While the firm is trying to make inroads in the mobile arena, it is unlikely that they will be able to compete with heavyweights Apple and Google, both of which have seen an explosive rise in stock price this year, as well as steadily increasing earnings.
Friday’s warning for the 2013 fiscal year prompted downgrades from several analysts, including Fitch who has cut the outlook to A-. According to Fitch, the downgrade reflects HP’s weaker than expected free cash flow, as well as a decline in revenue and profitability in 2013. Fitch expects enduring weakness in the enterprise division, as Cisco (NASDAQ: CSCO) seems to be increasingly dominant in the Industry Standard Server segment. All in all, Fitch doesn’t seem very convinced with HP’s plans or near-term outlook.
In summary, HP appears to be in a period of decline, as the new giants of the tech sector are gobbling up market share in almost every segment. While the stock is historically cheap at the moment, the price may have room to fall further as the firm has adjusted its outlook downwards. It seems increasingly unlikely that the company will be able to remain competitive in the rapidly changing tech environment, and as such, I would advise caution to investors appraising Hewlett-Packard’s valuation at the moment.
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