A nearly 60% rally so far this year hasn’t been of much help to long-term investors in Hewlett-Packard Company (NYSE:HPQ) , with the stock still down over 50% from its levels in early 2010, but it has been quite welcome to any who bought the stock recently as HP fights to be one of the top-returning large cap stocks of 2013.
Technology hardware businesses have not done well recently, hitting not only Hewlett-Packard Company (NYSE:HPQ) but also companies such as Dell Inc. (NASDAQ:DELL) . While those which made an earlier transition to focus on software and services, which HP is currently in the process of doing, have seen somewhat better fortunes. International Business Machines Corp. (NYSE:IBM) is an one example of this.
The first quarter of Hewlett-Packard Company (NYSE:HPQ)’s current fiscal year ended in January. While the company reported a 6% decline in revenue compared to the same period in the previous fiscal year, and earnings were down 16%, these numbers easily beat analyst expectations. As a result, the stock went up strongly on the day.
HP’s internal guidance centered on $3.50 in earnings per share for the fiscal year, and the Street has essentially adopted that figure as its own target. This makes for a current-year P/E multiple of 7, and even though HP has been declining, if it can moderate the decreases in earnings, that price is cheap enough that it could be a good value.
Renaissance Technologies, whose founder Jim Simons is now a billionaire, increased its holdings of Hewlett-Packard Company (NYSE:HPQ) 12% in Q4 to a total of 4.9 million shares (see Renaissance’s stock picks). Ralph Whitworth’s Relational Investors had HP as one of its five largest holdings at the end of December, according to that fund’s 13F filing.
Yacktman Asset Management, managed by Donald Yacktman, was another major shareholder during the fourth quarter of 2012, maintaining a position of almost 11 million shares. Our interest in hedge fund holdings is driven by our findings that the most popular small cap stocks among hedge funds have outperformed the market by 18 percentage points per year, despite the lag between actual investment and the date at which they are filed.
We have already mentioned Dell and IBM as potential peers for Hewlett-Packard Company (NYSE:HPQ). Dell, fielding buyout offers from a number of parties, experienced double-digit percentage declines in both revenue and earnings in its most recent fiscal quarter. Investors certainly have considerable upside if a deal is done, and bids might increase over time if multiple parties remain interested in Dell.
At a forward P/E of 8, there is some risk if no deal occurs — note that this is a premium to HP despite the poorly performing business — so it would be important to game out how much lower Dell’s stock would go in that event. IBM has managed to keep its business more stable, with some actual earnings growth derived from higher net margins, but as a result, the trailing P/E is 15. The company has been engaged in significant buybacks, and between that and a couple years of continued earnings growth it could have value potential.
Hewlett-Packard Company (NYSE:HPQ) can also be compared to Microsoft Corporation (NASDAQ:MSFT) and Accenture Plc (NYSE:ACN) . Microsoft trades at 9 times forward estimates, and while that is low, we’d be worried that it is based on what would be temporarily higher results stemming from the new versions of Windows and Office. Adding to the standard concerns about the sell-side often being too bullish — and the fact that this is actually a premium to HP even with the boost to earnings — and we would avoid it.
Accenture has been doing quite well; in its most recent fiscal quarter, revenue grew 10% from and net income rose strongly. The market has priced in some growth — the trailing and forward P/Es are 18 times and 16 times, respectively, but we’d note that this pricing generally implies considerably lower growth rates than what Accenture has been experiencing recently.
So, we would be interested in seeing if Accenture can continue to deliver solid growth, and therefore prove to be undervalued at its current price. HP, even after its rally, does look cheap in terms of guidance for this fiscal year, and we would be interested in doing further research to see if it can continue to be “less bad than expected.”
The article Will This Tech Giant Be Able to Sustain Its Momentum? originally appeared on Fool.com is written by Jake Mann.
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