HP on Sale?

By Keith Speights - April 24, 2012 | Tickers: ACN, DELL, HPQ, IBM, LXK | 0 Comments

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In today’s uncertain economy, many shoppers clip coupons and compare retailers’ prices to get the best deal possible. Unfortunately, there are no coupons for getting a better deal on stocks. However, the principles used by coupon champions make sense for investors also. If you’re looking for a technology stock on sale, Hewlett-Packard (NYSE: HPQ) might be a bargain.

Let’s first do a little comparison shopping. HP competes against Dell (NASDAQ: DELL) and IBM (NYSE: IBM) in the enterprise server market. Accenture (NYSE: ACN) is a significant competitor in services. Lexmark (NYSE: LXK) battles HP in the printer market. The table below shows how HP stacks up against these peers:

One thing immediately jumps out from these numbers. HP seems to be dirt cheap right now with a forward P/E of 5.55. It has a decent return on equity and dividend yield. So, bargain hunters, we’ve got a sale on HP on aisle 2, right? Maybe and maybe not. There is an important figure left out in the table - growth. The last few years haven’t been great for HP. Total revenue for 2011 was less than 1% higher than 2010. 2011 net income was actually lower than it had been in three of the prior four years. A meteoric jump in revenue or earnings growth also does not appear to be on the horizon for the once-great technology giant. However, the consensus among analysts is for HP to grow earnings next year around 9%. Not awe-inspiring but not too shabby.

Two of HP's competitors don't do well in the growth department. Dell's revenues have been essentially flat for the past few years, although earnings have started to look better recently. Lexmark's revenues are on a multi-year downward trajectory with 2011 earnings lower than 2010 figures. Accenture and IBM have experienced solid growth in revenues and earnings. Of course, their P/E ratios reflect this strength. Looking to next year, analysts project that Lexmark will have no earnings growth and Dell will have a low earnings growth rate. Projections for Accenture and IBM are for earnings growth around 10%. These comparisons put HP in the middle of the pack, but remember that its stock is significantly cheaper than the others.

Despite HP’s anemic recent growth, the company has several things in its favor:

1. It seems unlikely that the stock could go much lower. HP bottomed out at  $21.50 per share in the overall market correction last October. It is now only 14% higher than its 52 week low. From a technical viewpoint, the stock appears to have a support level so far in 2012 just a little under $23.
2. CEO Meg Whitman’s strategic plan makes sense. She is steering the company to focus more on higher margin enterprise markets. This plan should pay off in the long run but could take some time to show fruit. Whitman is steady and pragmatic, two qualities needed by HP during its repositioning for the future.
3. Even though most analysts aren’t terribly excited about HP right now, the consensus estimates call for the stock to rise nearly 20% to around $30 per share during the next twelve months. This seems very possible barring major headwinds in the global economy.

The bottom line is that HP is trading at historically low levels and appears to have more room to go up than down. There aren’t any coupons to clip out of the Sunday paper, but you probably aren’t going to find HP on sale much more than it is right now.

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