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Oracle to Buy HP, Should they do it?

May 17, 2011 | About:

crafool

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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

Rating: 2.9/5 (30 votes)

Comments

ElmerJFudd
ElmerJFudd - 3 years ago
I disagree. Oracle is doing just fine and they are the top two (or maybe three) strongest in the single most profitable over the long term part of the technology industry: enterprise software (which cannot easily be replaced, unlike operating systems, tools, and other such things). There is no good reason for Oracle to dilute that earnings stream. I would sell ORCL if they bought HPQ.
crafool
Crafool - 3 years ago
Mr. Fudd,

I agree Oracle is doing just fine as an operating technology comapny, however there is no doubt that Oracle stock is selling at a premium to the market as a whole and the technology sector. Oracle could double its earnings, and not dilute as you say their earnings by purchasing HPQ. A stock with an overvalued share price has a valuable currency when other companies in an industry it understands are trading at extreme discounts to value. As Warren Buffett would most likely tell you, there is no law that says you have to reinvest in your own company, and that all investing is value investing and that growth is a nice addition but not the sole focus.

Happy investing to all. Crafool

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