Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Does Hewlett-Packard Company (HPQ)’s Big Jump Today Make Sense?

Hewlett-Packard Company (NYSE:HPQ) swims against the market currents today. The stock jumped as much as 3.2% overnight, while the Dow Jones Industrial Average has traded in the red all day. HP is the Dow’s largest gainer today by a wide margin, adding more than five points to the index’s value.

Hewlett-Packard Company (HPQ)

HP’s big jump rests on an upgrade from major analyst house Morgan Stanley. Star analyst Katy Huberty raised her view on the stock from “neutral weight” to “overweight,” or what most would call an upgrade from “hold” to “buy.” Her price target sits at $27 per share, which is a 22% premium to Friday’s closing price.

What’s behind this upgrade? Faster cash flows, mostly.

Huberty believes Hewlett-Packard Company (NYSE:HPQ)’s payroll cuts will help the company convert inventories into cash sales faster than expected. The cash conversion cycle should shorten to 23 days by the end of the year — and maybe as low as 20 days if the business improvements continue. These would be drastic improvements from HP’s current situation.

HPQ Days Sales Outstanding Chart

HPQ Days Sales Outstanding data by YCharts.

Huberty sets her valuation targets for HP by comparing its expected cash flows to those of computing rival Dell Inc. (NASDAQ:DELL), which is trading at low multiples despite a brewing buyout. Both companies face the same massive headwinds, so it makes sense to apply similar cash-flow multiples. In other words, Huberty’s $27 price target is based on some fairly pessimistic assumptions.

So I can understand why traders are all over Hewlett-Packard Company (NYSE:HPQ) today. A big analyst name makes a compelling case for shares rising far higher — that is, as long as you believe in Huberty’s assumptions.

I’m not at all sure that HP’s cost-cutting moves will result in stronger cash-conversion cycles, because demand for the company’s products is falling through the floor. HP’s traditional PC systems are becoming obsolete as tablets and smartphones start to do many of the jobs a desktop used to handle, so the overall market is shrinking. Gaining market share in a dying sector doesn’t exactly scream “Buy!” to me.

The article Does HP’s Big Jump Today Make Sense? originally appeared on Fool.com and is written by Anders Bylund.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Loading Comments...