Ticker:
HPQ
Sector:
Technology
Industry:
Computer Hardware
Recommendation:
HOLD
Pricing
Closing Price
$48.46 (2/14/10)
52-wk High
$52.95 (2/14/10)
52-wk Low
$25.39 (2/14/10)
Market Data
Market Cap
$114.08B
Total assets
$114.799B
Valuation
EPS (ttm)
$3.14
P/E (ttm)
15.45
Profitability & Effectiveness (ttm)
ROA
6.72%
ROE
19.28%
Profit Margin
6.69%
Overview:
Hewlett-Packard (HP), one of the world’s largest technology
companies, offers a multitude of products, services, and software.
Within the past couple years, the company acquired Electronic Data
Systems (EDS) to improve one-stop shopping for global enterprises.
On September 23, 2009, HP changed the name from EDS to HP
Enterprises Services. The HP Enterprise Services segment offers
solutions for companies with industry standard storage and severs
products. HP’s service segment offers IT services, which range from:
consulting and integration, as well as, outsourcing a company’s
services. HP’s software segment has useful management software,
information management, and business intelligence systems. HP’s
personal computer segment offers a full product line of different
commercial and personal computer products. Also, HP’s printing and
imaging segment helps offer customers many products from printers
to scanners. HP also has a finance segment for financing the
purchases of their products. HP’s financing segment also helps out
small to medium businesses as well as different government entities.
Recommendation: I believe that this company is a HOLD. The
company has a long operating history, with a loyal customer base, as
Analyst:
well as extremely high growth rates in the last five years. The
enormous budget for R&D ($2.8 billion) promises continued
Jeff Griffith
innovative products. The CEO is very competent, and the industry has
jmgxb6@mail.missouri.edu
a promising future. Using conservative growth rates for HP this
company has an extremely high intrinsic value and is undervalued.
Based on the IFM portfolio committee report, we should not invest
any more funds into technology. Even though this stock appears to
be significantly undervalued, I believe that we should hold our current position because we currently
hold about a significant number of shares of HPQ which makes up about 3.5% of our current stock
portfolio.
Oper. Margin
8.85%
Major characteristics:
HP is the largest worldwide seller of personal computers.
According to Software Top 100, HP is the 6th largest software company in the world.
HP is #2 globally in IT services.
HP is the 9th largest company on the Fortune 500 Ranking.
HP has 21% of the PC market share, while Acer, HP’s closest competitor since it surpassed Dell in Q3, has
14% market share.
Core competence:
HP’s core competencies are creating solutions, building demand for those solutions, and then servicing
those solutions. To create solutions HP creates a mix of products that customers want, such as designing
the printers, servers, and computers. The innovative products that HP sells build demand for HP’s
solutions. Then the continuous application of maintenance and consulting complements the other two
competencies.
SWOT Analysis
Strengths: Relative to its competitors, HP has a broad portfolio of different operating segments
allowing diversified earnings. Approximately 64% of HP’s net revenues come from international
markets, and the company continues to expand into emerging markets. HP is a leader or among
the leaders in each of their business segments. With HP’s acquisition of EDS, and possible
acquisition of 3Com, HP can offer better one-stop shopping. HP’s new CEO, Business Week’s
CEO of the year for 2007, Mark Hurd, has brought tremendous growth to the company.
Weakness: Because of HP’s diversified earnings, it is less specialized in its different operating
segments. To keep its competitive position, HP offers many innovative products which results in
high R&D costs that must be expensed when they occur. The demand for HP’s products is
difficult to forecast which often leads to surpluses or shortages of its products.
Opportunities: HP’s high R&D budget, which is used to create many diverse and innovative
products, allows the company the ability to find many opportunities with the creation of new
products. HP continues to expand into emerging markets which will bring in future revenues.
Exposure to the emerging markets provides the company with a new market to sell its maturing
products. The demand for technology will continue to grow because the world is becoming
increasingly more connected.
Threats: In HP’s industry the probability that a competitor will cut prices is high, which results in
pricing wars. Also, HP’s financial performance is largely dependent on the market conditions
and if we are to see a second dip in the market, HP will likely be greatly affected by it.
Breakdown of 2009 Financials by the 7 Operating Segments for HP
Revenue
Growth
2008-2009
Revenue
Growth
2007-2008
Operating Income
(mm)
$
35,305.00
$
1,661.00
4.70%
30%
-17%
16%
$
24,011.00
$
4,310.00
17.95%
21%
-18%
3%
$
15,359.00
$
1,518.00
9.88%
13%
-21%
4%
HP Services
$
34,693.00
$
5,044.00
14.54%
30%
55%
35%
Software
HP Financial
Services
Coporate
Investments
$
3,572.00
$
684.00
19.15%
3%
18%
20%
$
2,673.00
$
206.00
7.71%
2%
-1%
16%
$
768.00
-7.29%
1%
-20%
27%
Personal
Systems
Imaging and
Printing
Enterprise
Storage
Operating
Margin
Percent of
Total
Revenue
Revenue
(mm)
$
(56.00)
Competitors: HP is an enormous company with many different business segments and the list of
competitors is enormous. IBM is probably the company that most closely mirrors HPQ’s operations.
DIRECT COMPETITOR COMPARISON
HPQ
ACN
DELL
IBM
Industry
Market Cap:
114.57B
25.61B
27.08B
162.44B
1.41B
Employees:
304,000
176,000
76,500
N/A
4.90K
-7.90%
-11.20%
-14.90%
0.80%
8.10%
114.55B
22.45B
51.43B
95.76B
958.78M
Gross Margin (ttm):
23.59%
30.01%
18.25%
45.72%
38.98%
EBITDA (ttm):
15.80B
3.32B
3.44B
23.16B
187.68M
Oper Margins (ttm):
9.62%
12.59%
5.15%
19.00%
10.60%
Net Income (ttm):
7.66B
1.55B
1.45B
13.43B
N/A
EPS (ttm):
3.143
2.375
0.741
10.008
0.38
P/E (ttm):
15.42
17.05
18.68
12.39
20.14
1.13
1.1
1.24
1.12
1.44
Qtrly Rev Growth (yoy):
Revenue (ttm):
PEG (5 yr expected):
P/S (ttm):
1.00
1.13
0.53
1.69
1.48
ACN = Accenture plc
DELL = Dell Inc.
IBM = International Business Machines Corp.
Industry = Diversified Computer Systems
Performance over the past 5 years compared to competitors: DELL, IBM, AAPL, S&P500 and the
Computer Hardware industry. Over the last 5 years, Apple appears to be the leader in this industry with
HP in second.
Stock price change over the past 2 years: HP’s stock price begins to rise as the market turns around
but, unlike the S&P 500, HP as well as the Computer Hardware industry have reached their prices from
before the market crashed.
Stock price change over the past year compared to competitors: HP as well as its competitors are all
seeing rising stock prices in the past year, but compared to the majority of its competitors HP has not
seen as large of an increase.
Discounted Cash Flow
Some of the growth rates used in the DCF above were from Yahoo Finance. The only growth rates that
did not come from Yahoo were 5% for 2016-2019 and the 2.5% second stage growth rate. I used these
growth rates because I felt that they were both conservative and reasonable.
The table below shows a sensitivity analysis, where I changed the first stage growth rates as well as the
discount rate. Please note that the first stage growth rates that I used in the sensitivity analysis were
held steady for the first 10 years.
Sensitivity Analysis
First Stage Growth Rates
Discount Rate
2%
4%
6%
8%
10%
$54.20
$62.52
$72.20
$83.44
11%
$48.33
$55.46
$63.74
$73.32
12%
$43.71
$49.92
$57.10
$65.39
13%
$39.98
$45.45
$51.76
$59.03
The intrinsic value for HPQ of $87.42 is much higher than the current stock price of $48.46 (as of
2/12/10). This indicates stock for this company is currently undervalued based on the analysts’
estimated growth rates.
Wall Street Analysts’ Opinions:
Current Month
Last Month
Two Months Ago
Three Months
Ago
Strong Buy
14
13
13
13
Buy
13
12
12
12
Hold
5
5
5
5
Underperform
0
0
0
0
Sell
0
0
0
0
Data provided by Thomson/First Call
S&P Recommendation:
12 Month Target Price as of Feb. 10, 2010 = $67.00
Qualitative Risk Assessment: Medium
S&P Quality Ranking: B+ (Average)
S&P Fair Value Rank: 4+ (Stock is moderately undervalued)’
Volatility: Low (HPQ ha had low price volatility over the past year)
Technical Evaluation: BEARISH (since January 2010)
5 STARS = STRONG BUY
Financial Statements
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the fiscal years ended October 31
2009
2008
2007
In millions, except per share amounts
Net revenue:
Products
Services
Financing income
Total net revenue
Costs and expenses:
Cost of products
Cost of services
Financing interest
Research and development
Selling, general and administrative
Amortization of purchased intangible assets
In-process research and development charges
Restructuring charges
Acquisition-related charges
Pension curtailments and pension settlements, net
Total operating expenses
Earnings from operations
Interest and other, net
Earnings before taxes
Provision for taxes
Net earnings
Net earnings per share:
Basic
Diluted
Weighted-average shares used to compute net earnings per share:
Basic
Diluted
$
74,051 $
40,124
377
114,552
91,697 $
26,297
370
118,364
84,229
19,699
358
104,286
$
56,503
30,695
326
2,819
11,613
1,571
7
640
242
—
104,416
10,136
(721)
9,415
1,755
7,660 $
69,342
20,028
329
3,543
13,326
967
45
270
41
—
107,891
10,473
—
10,473
2,144
8,329 $
$
3.21 $
3.35 $
2.76
$
3.14 $
3.25 $
2.68
63,435
14,959
289
3,611
12,430
783
190
387
—
(517)
95,567
8,719
458
9,177
1,913
7,264
2,388
2,483
2,630
2,437
2,567
2,716
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
October 31
2009
2008
In millions, except
par value
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Financing receivables
Inventory
Other current assets
Total current assets
Property, plant and equipment
Long-term financing receivables and other assets
Goodwill
Purchased intangible assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings
Accounts payable
Employee compensation and benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Other accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value (300 shares authorized; none issued)
Common stock, $0.01 par value (9,600 shares authorized; 2,365 and 2,415 shares issued and
outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
$ 13,279 $ 10,153
55
93
16,537 16,928
2,675
2,314
6,128
7,879
13,865 14,361
52,539 51,728
11,262 10,838
11,289 10,468
33,109 32,335
6,600
7,962
$114,799 $113,331
$
1,850 $ 10,176
14,809 14,917
4,071
4,159
910
869
6,182
6,287
1,109
1,099
14,072 15,432
43,003 52,939
13,980
7,676
17,299 13,774
—
—
24
24
13,804 14,012
29,936 24,971
(3,247)
(65)
40,517 38,942
$114,799 $113,331
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended October 31
2009
2008
2007
In millions
Cash flows from operating activities:
Net earnings
$ 7,660 $
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
4,773
Stock-based compensation expense
635
Provision for doubtful accounts — accounts and financing receivables
345
Provision for inventory
221
Restructuring charges
640
Pension curtailments and pension settlements, net
—
In-process research and development charges
7
Deferred taxes on earnings
379
Excess tax benefit from stock-based compensation
(162)
Other, net
(54)
Changes in assets and liabilities:
Accounts and financing receivables
(549)
Inventory
1,532
Accounts payable
(153)
Taxes on earnings
733
Restructuring
(1,237)
Other assets and liabilities
(1,391)
Net cash provided by operating activities
13,379
Cash flows from investing activities:
Investment in property, plant and equipment
(3,695)
Proceeds from sale of property, plant and equipment
495
Purchases of available-for-sale securities and other investments
(160)
Maturities and sales of available-for-sale securities and other investments
171
Payments made in connection with business acquisitions, net
(391)
Net cash used in investing activities
(3,580)
Cash flows from financing activities:
(Repayment) issuance of commercial paper and notes payable, net
(6,856)
Issuance of debt
6,800
Payment of debt
(2,710)
Issuance of common stock under employee stock plans
1,837
Repurchase of common stock
(5,140)
Excess tax benefit from stock-based compensation
162
Dividends
(766)
Net cash used in financing activities
(6,673)
Increase (decrease) in cash and cash equivalents
3,126
Cash and cash equivalents at beginning of period
10,153
Cash and cash equivalents at end of period
$ 13,279 $
8,329 $
7,264
3,356
606
275
214
270
—
45
773
(293)
(61)
2,705
629
47
362
387
(517)
190
(74)
(481)
(138)
(264)
89
1,749
235
(165)
(567)
14,591
(2,808)
(633)
(346)
1,031
(606)
2,603
9,615
(2,990)
425
(178)
280
(11,248)
(13,711)
(3,040)
568
(283)
425
(6,793)
(9,123)
5,015
1,863
3,121
4,106
(1,843)
(3,419)
1,810
3,103
(9,620) (10,887)
293
481
(796)
(846)
(2,020)
(5,599)
(1,140)
(5,107)
11,293
16,400
10,153 $ 11,293