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Using the Value Line Report: Hewlett-Packard: A Compelling Turnaround Tale for the Digital Age
“We are in a multi-year journey to turn HP around, and we have put in place a plan to restore HP to growth. We know where we need to go, and we're making progress. We continue to drive product innovation in our core markets, with a focus on cloud, security, and big data. We see big opportunities ahead, and we are well positioned to take advantage of these opportunities with our remarkable set of assets and strengths. We have the people, the plan, and the foundation in place to help us succeed on the next phase of the journey.”- Meg Whitman; HP President and CEO
Not unlike so many of its kin in the technology sector, computer manufacturer Hewlett-Packard (HPQ - Free H-P Stock Report) has come a long way from its beginnings in the “one-car garage” where electrical engineers and Stanford alum, Bill Hewlett and Dave Packard, initially formed the company (1939) and built its first product, a precision audio oscillator. Several decades later, the company has grown to become the world’s largest personal computer (PC) vendor by unit sales (2012) and is ranked the third-largest information technology company in the world, by revenue (2012).
However, in spite of its massive scale and its formidable market position in the tech industry, the tech giant has faced tremendous challenges over the past several quarters, going back as far as late 2011, when the company’s performance took a troubling turn and a subsequent slew of sales and earnings disappointments, accompanied by some steep restructuring losses, sent the stock into a tailspin. A quick glance at the price performance Graph and the annual High/Low price points just above it, exhibits the steep slide that HP shares endured from 2011 to 2012. Although there has been a flurry of finger-pointing regarding the cause of the aforementioned setbacks, the broader consensus contends that the company had suffered from bad press related to missteps by recent managers (prior to Meg Whitman), including Mark Hurd and subsequent CEO Leo Apotheker. This, coupled with the onset of a global decline in PC markets and HP’s unrewarding foray into the PDA/Tablet space over the past decade, has undoubtedly exacerbated the effects of an already strained operational dynamic and left the business struggling to regain its financial footing and return to its former glory.
Notwithstanding the aforementioned stumbling blocks, the company’s current President and CEO, Meg Whitman appears to be on track to right the ship. Although HP remains somewhat far from being out of the woods, the outlook seems to be increasingly positive, and the market has responded favorably to the news. Indeed, the stock recently hit a 52-week high on the strength of its ongoing shift in corporate strategy and business model towards cloud computing, software, and enterprise-related ventures, which appears to be slowly paying off.
A look at the company’s Price/Earnings Ratio (P/E) reveals that it is currently trading well below the average market P/E. Although this by no means indicates that the stock will continue to rise, based on the impressive market response to the more encouraging outlook (stock is up almost 65% year-to-date), a P/E of approximately 11x earnings (based on the Value Line methodology) suggests that the equity has more room to run.
Furthermore, when we scan over to the Financial Estimates Array and analyze the 3- to 5-year projections, it appears that the long-term horizon is reasonably solid, as well. Analyst Theresa Brophy seems cautiously optimistic that HP can stabilize its margins over the next couple of years, and is likely to gradually expand them over the long haul. This projected sales and earnings recovery ought to drive the stock higher out to late decade, which is further confirmed by the Target Price Range data, which lives in the upper left-hand corner of the page and is displayed by the graph points on the upper right-hand corner of the page. These figures suggest that HPQ shares have decent price appreciation potential over the pull to 2016 - 2018.
Moreover, examining the company’s financial condition offers some more support for this issue, as the Current Position and Capital Structure boxes provide insight into the health of HP’s balance sheet. While the debt-to-capital ratio is not ideal, it is manageable, particularly considering the company’s solid cash reserves, which have risen nicely since 2011. A glance down at the Financial Strength Ratings box offers further evidence of Hewlett-Packard’s fair flexibility, as a rating of B++, while not exemplary, is a modestly better-than-average score.
All told, investors should be mindful that HPQ shares are a risky play at this juncture. In the Analyst Commentary, Ms. Brophy notes that, “The company faces an uphill climb in its quest to get sales and earnings back on track.” Management has just begun to implement strategic initiatives that have yet to be proven successful. Although HP has a long and decorated history, the current turnaround story here is in its fledgling stages and faces considerable obstacles on the horizon.
At the time of this article’s writing, the author held no positions in any of the companies mentioned.