Is the Company Undervalued at This Price?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hewlett Packard (NYSE: HPQ) shares took a 12% hit on Tuesday when it announced in its quarterly earnings report that the company had written down $8.8 billion as it had discovered “serious accounting improprieties” in the British software company, Autonomy, which it acquired in 2011. The British company, HP’s financial statement noted, had “outright misrepresented” its own value.

The non-cash charge was for impairment of goodwill and intangible assets associated with the acquisition of Autonomy, and it wiped out HP’s profit. The latest financial statement shows a loss of $6.9 billion against a $200-million profit a year back.

In light of the current charge and negative impact of similar news in the last 16 months or so, we look at whether HPQ is a hold, buy or sell at this price.

The Story So Far

This is not the first time that HP stock has faltered due to the Autonomy acquisition. It was considered an expensive blunder at the time, and the market was unimpressed by the 64% premium that HP paid on Autonomy’s market price. HP stock fell by a whopping 20% when the deal was announced in 2011. The then CEO Leo Apotheker, who had called Autonomy “a highly profitable and globally respected software company, with a well-regarded management team and talented, dedicated employees,” left the company soon after.

There seems to be a method to HP’s system of due diligence and evaluation of companies it acquires. Only a few months back, in August 2012, HP had announced that it would be taking an accounting charge of $8 billion on account of its acquisition of Electronic Data Systems in 2008. Then HP had said that the results were not up to the expectations, while this time around,the company is taking up the matter with United States’ SEC and the UK’s Serious Fraud Office.

Regardless of what comes out of these measures, the money is gone forever and not going to come back.

The company also announced that it would take a charge of $1.5 billion -- $1.7 billion instead of the projected charge of $1 billion on account of cutting jobs as more workers had opted for earlier retirement.

It has been a continuous flow of negative news for HPQ in this and the previous quarter. It is unsurprising for investors to wonder whether there is any value left in the company. At the same time, there are investors who would want to know whether it is a good buy at this level.  

Financials

Let us have a look at the fiscal fourth quarter financial statement from a different angle. Fourth quarter GAAP loss per share of $3.49 is definitely one we would be concerned about. However, if one does not take into account the charges in the fiscal fourth quarter, the non-GAAP earnings per share is $1.16, which is only 1% down from the same quarter in the previous year but above the average forecast of $1.14 per share.

While net revenue is down by 7% compared to the same period prior-year, when adjusted to currency changes, the drop is only 4%. However, cash flow from operations has shown an impressive increase of 69%. The company has also distributed $384 million to shareholders by way of income distribution (dividend 13.2 cents) and share repurchases. The highlight of the financial results however is the company’s non-GAAP operating margin of 10.4% (up by 9.7% over the prior-year quarter) and net earnings of $2.3 billion.

On the other side, there was a 5% drop in printing revenue, a 14% drop in revenues from personal systems, and a 6% drop in services revenue. Software revenue, however, grew by 14%.

The Road Ahead

Most of the woes of HP have been due to the bad choices it made in its acquisitions. While the then-CEO and strategy officer are being made out as scapegoats, the fact of the matter is that the current CEO, Meg Whitman, and most of the board voted for the acquisition of Autonomy. At the same time, Whitman has taken some bold steps on taking office.

Whitman reversed the previous decision of shelving off the company’s PC business that gave the company $40 billion in revenue and a $2-billion operating profit. She has also not shied away from accepting the mistakes and writing off losses so as to clean up the balance sheet. In the last year, Hewlett Packard has reduced its net debt by $5.456 billion (down to $17.135 billion from $22.591 billion).

The company’s 4.51% dividend yield is more than that of Microsoft (3.44%) and a tad below Intel (4.61%).

Per the company’s guidance, it estimates non-GAAP EPS of $0.68 - $0.71 (GAAP EPS $0.34 - $0.7) in the first fiscal quarter 2013 and $3.40 - $3.60 (GAAP EPS$2.10 - $2.30) for the full year. Estimates exclude tax costs of roughly $0.34 (Q4FY2013) and $1.30 (FY2013) per share.

Considering the cleanup efforts of the current management, I would suggest investors to hold HPQ. Those considering buying the stock can expect to see an impressive appreciation in the long term plus a reasonable dividend yield.


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