Earnings Analysis: Hewlett-Packard Co. (NYSE:HPQ)

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Hewlett-Packard Company (NYSE:HPQ) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Hewlett-Packard Company (NYSE:HPQ)

Hewlett-Packard Co.’s analysis versus peers uses the following peer-set: Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM), Cisco Systems, Inc. (NASDAQ:CSCO), EMC Corporation (NYSE:EMC) and Dell Inc. (NASDAQ:DELL). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-10-31 2011-10-31 2010-10-31 2009-10-31 2008-10-31
Revenues 120,357.0 127,854.0 125,682.0 114,552.0 118,364.0
Revenue Growth % (5.9) 1.7 9.7 (3.2) 13.5
Net Income (12,650.0) 7,074.0 8,761.0 7,660.0 8,329.0
Net Income Growth % (278.8) (19.3) 14.4 (8.0) 14.7
Net Margin % (10.5) 5.5 7.0 6.7 7.0
ROE % (41.4) 17.9 21.6 19.3 21.5
ROA % (10.6) 5.6 7.3 6.7 8.2

Valuation Drivers

Hewlett-Packard Co.’s current Price/Book of 1.1 is about median in its peer group. HPQ-US’s PE multiple is negative now so EBITDA ratios provide better peer comparisons. HPQ-US’s share price implies less than peer median growth (Price to Ebitda multiple of 1.8 compared to peer median of 7.8). The market seems to expect HPQ-US’s around median rates of return (EBITDA return on equity of 46.0% compared to the peer median of 44.9%) to decline.

The company’s profit margins are below peer median (currently -10.5% vs. peer median of 15.5%) while its asset efficiency is about median (asset turns of 1.0x compared to peer median of 0.9x). HPQ-US’s net margin is its lowest relative to the last five years and compares to a high of 7.0% in 2008.

Economic Moat

Changes in the company’s annual top line and earnings (-5.9% and -278.8% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

HPQ-US’s return on assets is less than its peer median currently (-10.6% vs. peer median 9.3%). It has also had less than peer median returns on assets over the past five years (3.4% vs. peer median 10.2%). This performance suggests that the company has persistent operating challenges relative to peers.

The company’s comparatively low gross margin of 25.8% versus peer median of 51.5% suggests that it has a non-differentiated strategy or is in a pricing constrained position. In addition, HPQ-US’s bottom-line operating performance is below peer median (pre-tax margins of -9.9% compared to peer median 20.4%) suggesting relatively high operating costs.

Growth & Investment Strategy

HPQ-US’s revenues have grown more slowly than the peer median over the last few years (1.7% vs. 8.4% respectively for the past three years) and the stock price’s relatively low Price/EBITDA ratio of 1.8 implies relatively low future growth as well (Note: We use Price/EBITDA instead of PE due to negative earnings). Overall, we classify the company’s growth expectations as substandard relative to its peers.

HPQ-US’s annualized rate of change in capital of -3.6% over the past three years is less than its peer median of 11.4%. This below median investment level has also generated a less than peer median return on capital of 1.4% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

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