Hewlett-Packard’s strong second quarter of 2010 which exceeded consensus estimates has been widely reported on. However, we thought that seeing Hewlett-Packard (HPQ, Financial) through the lens of our EDMP, Inc. F.A.S.T. Graphs™ could add insight to this important technology powerhouse.
Figure 1 below looks at HPQ since 1991 based on price correlated to earnings. Note that HPQ’s price correlates to earnings very closely, with two significant exceptions. One, the infamous irrational exuberant period, that ended in 2000 (red circle). However, notice how quickly price reverted to the mean. The same can be said, only in reverse, regarding the price earnings relationship during the second exception, the recent “great recession” (yellow circle).
Figure 1: HPQ 20yr EPS Growth Correlated to Price
Figure 2 calculates the performance associated with Figure 1 including the modest dividend paid by this tech giant. Note how closely performance correlated to earnings growth since 1991.
Figure 2: HPQ 20yr Dividend and Price Performance
With Figure 3, we focus in on the period since 2004, where Hewlett-Packard returned to its normal growth trajectory after earnings fell during the post tech bubble of 2001 and 2002 (see Figure 1).
Figure 3: HPQ 7yr EPS Growth Correlated to Price
Hewlett-Packard’s second quarter 2010 GAAP net earnings growth of plus 28% is consistent with its 22.7% average growth since 2004. The consensus 5-year earnings growth estimate by analysts reporting to Zacks is 16.9%. This is slightly higher than the estimated growth for Apple (APPL) and much higher than estimated growth for Dell (DELL, Financial). Yet, HPQ is capitalized at almost half the multiple afforded Apple (AAPL, Financial), and even less than the market multiple for Dell (DELL) whose prospects are not nearly as good as Hewlett-Packard.
Figure 4: HPQ 5yr EPS Forecast
Conclusion
We believe that Hewlett-Packard (HPQ) is an undervalued technology blue chip. The recent acquisition of Palm opens the door for new growth opportunities in smartphones and other mobile devices. Therefore, investors looking for a high quality technology holding with a strong balance sheet and prospects for above-average growth should look no further than HPQ. For a more detailed analysis see our previous article (Hewlett-Packard: Past, Present, and Future) on January 27, 2010.
Disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Disclosure: Long: HPQ, AAPL at the time of writing.
Figure 1 below looks at HPQ since 1991 based on price correlated to earnings. Note that HPQ’s price correlates to earnings very closely, with two significant exceptions. One, the infamous irrational exuberant period, that ended in 2000 (red circle). However, notice how quickly price reverted to the mean. The same can be said, only in reverse, regarding the price earnings relationship during the second exception, the recent “great recession” (yellow circle).
Figure 1: HPQ 20yr EPS Growth Correlated to Price
Figure 2 calculates the performance associated with Figure 1 including the modest dividend paid by this tech giant. Note how closely performance correlated to earnings growth since 1991.
Figure 2: HPQ 20yr Dividend and Price Performance
With Figure 3, we focus in on the period since 2004, where Hewlett-Packard returned to its normal growth trajectory after earnings fell during the post tech bubble of 2001 and 2002 (see Figure 1).
Figure 3: HPQ 7yr EPS Growth Correlated to Price
Hewlett-Packard’s second quarter 2010 GAAP net earnings growth of plus 28% is consistent with its 22.7% average growth since 2004. The consensus 5-year earnings growth estimate by analysts reporting to Zacks is 16.9%. This is slightly higher than the estimated growth for Apple (APPL) and much higher than estimated growth for Dell (DELL, Financial). Yet, HPQ is capitalized at almost half the multiple afforded Apple (AAPL, Financial), and even less than the market multiple for Dell (DELL) whose prospects are not nearly as good as Hewlett-Packard.
Figure 4: HPQ 5yr EPS Forecast
Conclusion
We believe that Hewlett-Packard (HPQ) is an undervalued technology blue chip. The recent acquisition of Palm opens the door for new growth opportunities in smartphones and other mobile devices. Therefore, investors looking for a high quality technology holding with a strong balance sheet and prospects for above-average growth should look no further than HPQ. For a more detailed analysis see our previous article (Hewlett-Packard: Past, Present, and Future) on January 27, 2010.
Disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Disclosure: Long: HPQ, AAPL at the time of writing.
