Time to Talk Tech: Hewlett-Packard (HPQ)
Tuesday, April 19, 2022 2:00 PM



To date, 2011 has not been particularly kind to companies in the computer industry, at least those not named Apple. This includes all the big boys, IBM, Dell, Intel and Microsoft, as well as Hewlett-Packard (Ticker: HPQ). While the S&P is up 1.5% ytd, both Intel and HPQ are down, and Microsoft has eked out a negligible gain of 1%.  So, what gives?

The Problems

Pressure in the industry began with the proliferation of smart phones and tablet computers; both of which negatively impacted PC sales. As investors continue to be inundated with the ridiculously large unit sales figures coming from the Apple’s of the tech world they, quite naturally, started looking into the impact this has on the PC market. The result was significant pressure on stock prices for the entire sector, HPQ included.

Now, fast forward to last month’s horrendous series of disasters in Japan, and we have additional problems in the industry. The impact is still unknown, and uncertainty rarely equates to anything good for stock prices. With 14% of the world’s PC components coming from Japan, concerns about supplies added further pressure to an already down industry.

The Opportunity

That’s a lot of negatives for an industry, and a stock (HPQ), no doubt about it. So, where’s the opportunity in all this you may ask. The sell-off, and recent component supply concerns, is exactly what makes this industry in general, and Hewlett-Packard in particular, so attractive. As so often happens, the market moved in an almost knee-jerk reaction, overselling financially sound companies.

As an industry, PC makers have historically traded around 13.5 times earnings. As it stands right now, HPQ is trading at $40.31 per share, which is a shade over 10 times earnings; a bargain to say the least. Now, let’s take this one step further; projected forward earnings drop below 8 for the world’s largest maker of PCs, and that’s what has analysts taking another look not only at HPQ, but at the industry in general.

Hewlett-Packard has a few other things going for it that should please fundamental investors. HPQ is sitting on nearly $10 billion in cash, is cranking out over $9 billion in net income annually (this during a “down” year) and an operating margin of 10.49%, a figure many companies would kill for.

Conclusion

There are legitimate concerns, the biggest being the long-term impact of Japan’s disaster on PC component supplies. However, the impact of this uncertainty is already reflected in the current stock price and this, along with how cheap the stock is, should get HPQ onto a short-list of stocks to own.

As it stands now, profits for the industry are up, the margins are ridiculously good and they are essentially printing cash. While not quite shooting ducks in a barrel, HPQ is too good an opportunity for stock hunters to pass on.


 

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