Is Hewlett Packard A Value Trap or an Astonishing Bargain?

By Ryan Guenette - September 6, 2012 | Tickers: AAPL, DELL, HPQ, IBM, MSFT | 0 Comments

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Year to date, Hewlett-Packard  (NYSE: HPQ) is down a whopping 34.39%, vastly underperforming the S&P 500, which is up 12.06% during this period. HP is a provider of products, technologies, software, solutions, and services to individual customers and businesses of all sizes. The company’s main portfolio includes desktop computers, laptops, printers, monitors, computer accessories, software, and other products. Recently, in an attempt to try to reinvent its core business, Hewlett-Packard named a new chief executive officer, Meg Whitman. The company employs over 350,000, and valued at $33.32 billion on the New York Stock Exchange. So after falling so far so fast, is HP a value trap or an astonishing bargain?

Fluky Fundamentals

In 2002, Hewlett-Packard reported earnings per share of $0.83. In 2012, the average analyst consensus believes the company will derive $2.98 per share from its business operations. This represents a 259.04% increase in earnings per share over the course of a decade. Based on these statistics, HP’s compound annual growth rate (CAGR) is 13.64%, an encouraging sign. However, it is important to note that in 2012, the street projects the company to swing to a $1.18 per share loss. Hewlett-Packard’s growth is driving the right-direction over the long-term, but does not take a consistent smooth road higher. Additionally, the company pays out a dividend that outpaces the ten year treasury rate and inflation rate. Currently, HP pays out an annual dividend of $0.52, which at the current price, puts the dividend as yielding 3.12%. This is up from 2011’s annual dividend of $0.48, and is anticipated to remain steady into the future. From this we can see Hewlett-Packard Company’s underlying financial fluctuating strength and sustainable dividend.

The chart below displays HP’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

The Shift to Mobile

The world is rapidly shifting to mobile devices. Tablets and smartphones are becoming more popular than personal computers, as the consumer now demands devices that offer the power of a home computer, yet are mobile. The growth in the number of mobile devices shipped compared to personal computer shipments is shown below.

While HP offers laptops, which are mobile, their core business is home computers. They have expressed no plans to enter the tablet market, as they see know use in allocating a massive amount of money to developing a tablet that is unlikely to even compete with Apple’s iPad. If HP is able to innovate and dominate the laptop industry, they experience significant growth, as the chart below displays the shipments of mobile devices.

A final aspect of Hewlett-Packard that is noteworthy is the historically low prices it is rapidly approaching. The company has not seen prices under $20 since 2004. This is a monumental decline in the stock, and it is worth watching.

Who Is the Industry Trailblazer?

Compared to some of Hewlett-Packard’s most prominent competitors, such as: Dell Incorporated (NASDAQ: DELL), Apple Incorporated (NASDAQ: AAPL), International Business Machines Corporation (NYSE: IBM), and Microsoft Corporation (NASDAQ: MSFT), HP compares relatively unfavorably.

In terms of growth, Apple is the industry leader, while Hewlett-Packard is the industry laggard. All companies except for Dell pay out dividends, with HP possessing the largest dividend, and with IBM possessing the fastest growing dividend. In the fundamental ratio comparison, Dell appears to be a bargain, while Apple is a little pricy. When growth taken into account, Hewlett-Packard is trading at a premium to its peers, and Apple is the bargain. In the net profit margin comparison, Apple stands out to the upside, while HP stands out to the downside.

The Foolish Bottom Line

Hewlett-Packard has been falling, and falling, and falling. The company’s long term fundamentals appear strong, yet fluctuate. The company’s dividend is decently-sized, and should remain steady over the coming years. The shift to mobile is a major negative to HP’s business, but if the company is able to dominate the laptop market, it can offset the drop in its desktop sales. The company is approaching prices not seen since 2004, and may find these prices as support. Compared to its peers, Hewlett-Packard is decent at best. At the moment, HP is a falling knife, and when you try to catch a falling knife you get cut. All in all, Hewlett-Packard is trading at historically low prices, but is a value trap not positioned to take advantage of one the biggest shifts in the industry.   

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