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Hewlett-Packard (HPQ) Worth The Short?

Added on by Gordon Gekko .
hewlett packard.jpg

Be sure to check out our detailed stock analysis (click here). Hewlett-Packard (NYSE: HPQ) saw its stock pop over 10% in a single day last week on a big earnings beat. This despite a drop in profits and revenue, but a beat of consensus estimates. The earnings beat, and a ride on Dell's (NASDAQ: DELL) buyout coattails, has been enough to put HP's stock up almost 30% year to date:

The stock now trades over 50% its average Wall Street price target (see some other stocks that do as well). Assuming that a HP buyout is out of the question, for a number of reasons, including the fact that it would be much more difficult to pull off, is HP worthy of such a run up in its stock price? I would rather stay on the sidelines, especially since certain actions don't appear to be shaping up to unlock shareholder value. There was previous talk that the company could break itself up and unlock shareholder value in the process, but the board is now adamant that it has no plans to pursue the possibility. CEO Meg Whitman has also noted that it might take upwards of five years to turn the tech company around.  

As far as the recent earnings release, HP posted quarter ended results of $0.82 EPS, versus $0.92 from the same quarter last year. This did beat Wall Street estimates of $0.71; however, the company is expected to continue to see earnings contraction over the next couple of years:

  • 2011 EPS $4.88A 
  • 2012 EPS $4.05A
  • 2013 EPS $3.30E

Despite the progress made by Hewlett-Packard within its software and services business, the company faces a challenging situation. Concerns remain rampant over weak PC sales and a continued decline in weak printer shipments. Last quarter, HP got 17% of revenues from printer and copier sales, and over 50% of revenues came from its declining PC and printer businesses. Dell also posted better than expected EPS results of $0.40 last quarter, compared to estimates of $0.39--yet this was still below the $0.51 for the same quarter last year, and sales were down 11%. 

The pressures and weaknesses remain afoot in the PC market. One positive for HP is that it managed to regain its top spot in the PC market share during the fourth quarter:

Whereas the other 'hot topic' PC company, Dell, which is in talks to take itself private, lost almost 2% market share year over year, HP managed to gain 0.9%. This is much more important for HP, given the unlikelihood the company will go private and the apparent opposition to breaking the company up.

How does the PC market look for others? 

Apple (NASDAQ: AAPL) has been causing problems for all the major PC makers, with its cannibalizing smartphone and tablet devices, not to mention its own Mac computers. However, Apple has managed to shift away from the PC market and focus its exposure on the faster growing smartphone and tablet markets, which now account for 70% of the company's revenues. Apple's real stronghold appears to be in the smartphone market, with the iPhone accounting for 50% of the company's sales. What’s more is that its mobile device is quite popular in the market, with its mobile operating system (iOS) holding over 45% of the market share at the end of January. There have been some concerns over the company’s growth and margins, but its valuation remains compelling. The stock trades at only 10x earnings, and when coupled with its 20% annual expected growth rate, it’s an intriguing growth at a reasonable price opportunity at a PEG of 0.5.

Intel (NASDAQ: INTC) is another company being hit hard by the PC market decline, deriving almost 65% of its total revenue from PC related sales. Problems for Intel include that it appears to have no clear strategy for entering the tablet and mobile device market. Intel's stronghold is in the the desktop segment, which is seeing some of the most pressure from laptop, smartphone and tablet sales. However, data centers and data analytics will hopefully be Intel's savior (see why here), but I would still be cautious on the company until its clear strategy for diversifying away from PCs is revealed.

Meanwhile, Microsoft (NASDAQ: MSFT) has not seen quite the same decline due to weakening PC demand. The company has inherent exposure to the PC market with its operating systems, but its Windows 8 mobile operating system is the company's key attempt to break into the mobile space. Also, the company is working its way into the tablet space with its Surface. From a valuation standpoint, Microsoft trades on the cheap side, with an 18% 5-year expected EPS growth rate. This is on top of its 10x PE ratio, which is near the low end of its 5-year historical range of 9x to 18x, so I think Microsoft could well be worth taking a look at.

Should you be an owner of HP?

HP has a number of issues at hand, with the biggest and darkest cloud for investors being the computer company’s ability to effectively turn around its business and hedge against a declining PC industry. I remain cautious on how effectively, and quickly, HP can diversify away from its struggling PC and printer segments, which account for 50% of its revenues. I would not be an owner of the stock over the interim, and Wall Street tends to agree, with analysts expecting HP to post flat earnings over the next five years. Billionaire Ken Griffin of Citadel Advisors also sold off over 50% of his hedge fund’s stake in HP last quarter (see Griffin's latest moves).

Source: http://beta.fool.com/mhargra/2013/03/12/tu...