HP is in the news recently, pretty much for the last 6 months. And thanks to that the stock has been pummelled like crazy.
If you read newspapers and watch CNBC, you will realize that HP and Dell are on a downward spiral.
Often it is portrayed that they are in the same boat as Nokia and RIM.
Lets look at the financials over the past 8 years.
Book Value/Share has increased from $12.30/share in 2004 to $21.18/share in 2011. But here is the caveat, look at the Book Value without Goodwill. It has actually gone down significantly from $7.11/share in 2004 to $0.25/share in 2011. LT Debt over the years has gone from $4.6 billion to $22.5 billion ~ almost 5 times.
So what does that say – “Overpaid Acquisitions”.Not necessarily bad acquisitions, but HP has paid a lot to acquire the companies over these eight years.
We have Meg Whitman, the former CEO of eBay as the CEO as HP for the past year. She has effectively written down these overpaid investments of two companies – Palm and EDS. So obviously, the book value will go down now and it will be interesting to watch what else they will have to write down.
Let us look at the available upside.
- They still have $8 billion in cash
- They are going to make $4/share in earnings this year
- EBIT probably will be somewhere between $4 to $5/share
- R&D should go up and Meg has talked a lot about it
- FCF was $8 billion last year.
- FCF over 8 years was $65 billion
- They have paid back $8 billion in dividends and $60 billion in stock buy back in the past 8 years
- Shares remaining have gone down from 3 billion shares to 2.1 billion shares
So you can see this company understands shareholder value.
iPads and iPhones rule the world but there is still a place for good old PC especially when HP laptops are $500 each. Lenovo/ASUS is giving good competition but HP CAN and MUST work with its vendors to reduce cost to compete effectively.
EDS is a low margin business but that is not disappearing away. They can leverage the IBM model, which is not that hard to replicate and compete effectively.
They will have to innovate against the disappearing printer market, there is no other chance. Laser prints will stay but the ink money HP made years ago cannot be replicated. Autonomy purchase is another overpaid one. But it can help HP begin its ventures in to Software, especially Enterprise Software. They have the power of EDS to make money on consulting.
So yeah! HP is not disappearing purely because its not a one product company like RIM and is not focussed in one space like Nokia.
They have a 10 year run way and if they screw up in that process, then are done. But even doing minor changes can help save this company. One cannot innovate by overpaying for any acquisitions. Unfortunately, Meg Whitman herself at eBay has done a few of these overpaid acquisitions and I wouldn’t be surprised she does a few more with HP.
This company makes cash and hence I would value this at least at book value and 10x FCF or 10xEBIT.
With book value, it is around $21/share.
10xFCF is $80 billion and that is $38/share
10xEBIT is $50/share
I would stick more closer to $38/share and this is available at a 50% discount now.
If Meg really turns around the company and can streamline the business in a few years, then this is worth more.
There can be a lot of holes and this can pull this company down, but if the manager is smart, they can cut down and bleeding can stop at HP.
There is one more thing – HP has spent $30billion in R&D these years and., I haven’t heard any new crap from them in a long long time.
But stick to the basics on the FCF and 36k patents. There is some upside.
Disclosure: The author and his firm owns HP Stock and may choose to buy or sell more any time.