HP: Has it Become Oversold?

Image: HP

From HP's website: 

"The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure at the convergence of the cloud and connectivity, creating seamless, secure, context-aware experiences for a connected world"

HP has recently tested new 52 week lows, and are now priced at what seems to be a ridiculous 8.5x forecasted (forecasted by HP, that is) 2011 earnings. This is close to its lowest levels in the last 10 years. Generally, "old" tech companies have become rather cheap, with many of the major names like Microsoft, Cisco, and HP becoming unloved, despite their strong and consistent profitability. 

Disclosure:  I currently have no holdings in HPQ.

9Jul11

P=36.43

HPQ’s FY11 ends Oct31 11.

EPS_ttm=4.07

PER_ttm=8.95x

EPS_11f=4.27 [based on 2q guidance]

PER_11f=8.5x

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full HPQ chart at Wikinvest

I want to have a brand new look at HPQ. HP has since touched fresh 52 week lows on 15 Jun, with lowest being 33.95. It has since risen 7.3% off these lows indicating a firm rebound. Since then HP has released their new tablet based on WebOS (1Jul) creating this new resistance level around the 36$ level. The reviews have not been overwhelmingly good, reviewers like Cnet and Endgadget like the WebOS, dislike the hardware and lament the current lack of Touchpad-optimised apps. And of course endless comparisons with Android and Apple tablets, which the Touchpad does not beat.

Nonetheless, I want to work through the numbers with fresh eyes, and see if its returns are good, and whether HPQ is a value proposition. It still has market leadership in the PC and printer space, albeit with PC sales being the low margin business. All its other businesses are higher margin, with operating margins exceeding 10% while PC is 5%. While PC is still the biggest part of its revenue earners, at 29% in 2q, enterprise is 17%, services 28% and hence significant, and image and printing 21%. This does seem healthy. In terms of geography, US is 34% of sales, while asia-pac is 19% and EMEA is 37%. This is also well diversified.

HP has been a consistent performer in terms of EPS. It made money all the way through the lehman crisis and had one small –ve year in 2002. QOQ performance is also stable, since 2008, with EPS climbing slowly up, with some fluctuations. I can’t quite state specifically which Q is the strongest, as it does change, so it is likely to fluctuate based on capex demand from enterprises.

Image: HP 2Q slides

An examination of HP’s FCF yields interesting results. Using 2010 data, FV_10=39.64 or a 9% upside, at zero LTEG, while making an estimated 2011 results by linear adjustments yields a 41% upside, with FV=52.04. 2009 data gives FV=47.66 or a 31% upside. This indicates that HP is currently undervalued.

Greenblatt ratios: ROCE_10=15.3%, EY_10=10.6%. On a ttm basis, EY=11.7%, ROCE=16.2%. Leo Apotheker has said during their investor summit in Mar11 that they intend to hit $7 EPS in 2014. Or a 12% EPS/yr to get there.

18Aug is 3q release. Volatility is to be expected upon release, especially if it doesn't meet Street expectations.

Conclusion: BUY, Using 2009 FV as TP=47.66, upside is 31% and it is still trading at PER=11.2x at that price. Which is still cheap historically, and hence is sufficiently conservative.