HP Is Still Incredibly Cheap

 | Nov 27, 2013 | 9:30 AM EST
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We have recommended Hewlett-Packard (HPQ) a number of times this year. Our thesis has been that, while HP would not return to being a robust growth company, its stock price has been erroneously suggesting that the company was heading for the scrap heap of industry. In fact, management has been doing a very good job turning the business around -- and the company should ultimately be a mid-single-digit revenue grower with high-single-digit earnings growth.

So, at 6.9x earnings, we've considered the stock way too cheap, and have believed that it offers a compelling reward vs. risk profile. Specifically, we projected a three-to-nine-month target price in the low $30s.

After Tuesday's earnings release, we are feeling even more comfortable with that outlook -- and we're looking for continued share gains into 2014. So we'd continue holding on to the position, and we would keep buying at the $26.25-or-better level.

Following are some brief notes from Tuesday night's conference call:

• It was a solid quarter vs. expectations, particularly on revenue. The takeaway from this report is that HP is stabilizing -- a much better situation than what we saw a year ago, with the Autonomy writedown.

• HP is now halfway into the five-year time frame for completing the turnaround, as projected by CEO Meg Whitman. Whitman was proud of and pleased with the quarter, but understands that there's still much more work to be done.

• The company put in better performance in enterprise than in other comparable legacy companies, such as IBM (IBM), Cisco (CSCO), Oracle (ORCL) and so on. This is probably the biggest surprise, given the caution put forth most recently by John Chambers of Cisco. HP enterprise revenue was actually up 2%.

• Printing was surprisingly resilient: The unit is apparently not in an accelerating secular decline.

• The company did better in personal computers, probably because of the disarray and change in strategy at Dell.

• The commercial division was actually positive for the quarter.

• The balance-sheet recovery is nothing short of phenomenal: HP's cash position is now net positive, adjusting for finance company net debt. That has resulted from the company's emphasis on free cash flow generation.

• Forward guidance is unchanged and in line with expectations, even with the current environment described as choppy and challenging, with continued macroeconomic headwinds. For fiscal 2014, which just recently began, the midpoint of the company's forecast is $3.65 per share, plus or minus $0.10. That's up from $3.56 per share for the year that just ended.

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