Oracle to Buy HP, Should they do it?
HP just can't seem to get their act together. The stocks is off more than 30% in just over a year and hitting a fresh 52-week low. The company is trading at single digit P/E levels on both a trailing and forward basis, and this is even after management has guided earnings estimates lower. This is a far cry from the 33 P/E it sported in 2000, when the growth/momentum investors could see no wrong with the company. Now the company seems to appeal only to value investors that see the company having a rough enterprise value of around $41 a share and Value line estimates they will earn around $4.50 a share this year for an earnings yield of around 11% after tax and based on HP's estimated 22% corporate tax rate with a before tax earnings yield of 13.40% on the EV. Not a bad starting point when the current short-term rates are virtually zero and the 10-year Treasury yields an extremely low 3.20% more or less. (It seems from a valuation point of view like HP and the 10 Year Treasury have swapped places almost exactly since 2000.).
Why should Larry Ellison and Oracle take a run at HP? Well Oracle unlike HP is trading at around 22 times trailing earnings and around 15 times forward earnings. A nice premium to both the market and many other tech companies. This gives Oracle a market cap of around $170 billion versus HP's pathetic $87 or so Billion. Since HP is around half of Oracle's market cap and any buy out would require a premium, Oracle would have to use its stock to make the acquistion. I think swapping one stock with a bond like earnings yield to buy a company that despite low growth sports an equity like earnings yield might be a nice move for Oracle. The problem is acquisitions can be terrible if the acquiring company does not fully understand the takeover company, but I think Larry has an "Ace in the Hole" for he has Mark Hurd. The former CEO of HP at Oracle. I think he could get some pretty good color on HP and run it successfully with Hurd at the wheel.
Just a tought of my, and appreciate others sharing their own research on HP. Happy investing to all. Crafool