Hewlett-Packard Company (HPQ)’s Rally Was the Return of Market Sanity

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Hewlett-Packard Company (NYSE:HPQ)’s earnings and stock price have been fluctuating. After the company’s EPS dropped to a negative $3.49 for Q4 fiscal year (FY) 2012 and a negative $6.41 for the full fiscal year, Hewlett-Packard Company (NYSE:HPQ) posted a positive EPS of $0.63 for Q1 FY 2013. The majority of the damage to Hewlett-Packard Company (NYSE:HPQ)’s earnings was the result of one-time charges from restructuring and the impairment of intangible assets. These charges skewed earnings to the negative and spurred talks of the impending demise of the tech giant.

Hewlett-Packard Company (NYSE:HPQ)Back in November, when Hewlett-Packard Company (NYSE:HPQ)’s stock price sank to around $12, I wrote a post titled This PC Giant Is a Steal. The post pointed out that Hewlett-Packard Company (NYSE:HPQ) was still a cash cow and (after adding back restructuring and impairment charges) the company was trading at a bargain PE of about four. The stock market sometimes gives out insane valuations, and Hewlett-Packard Company (NYSE:HPQ) at $12 was one of them. Now that Hewlett-Packard Company (NYSE:HPQ)’s stock price has significantly appreciated it is important to revisit this topic.

Estimating HP’s value

In the trailing twelve months (TTM), HP posted a negative EPS of $6.55. Adding back restructuring and impairment charges and accounting for taxes, Hewlett-Packard Company (NYSE:HPQ) earned approximately $3.10 per share in the TTM. Thus, using a modest PE ratio of 10, HP is worth approximately $31 per share.

However, it is also important to take into account HP’s balance sheet. A company’s balance sheet is important because it contains earnings retained by the company. Currently, Hewlett-Packard Company (NYSE:HPQ) has a total debt of about $28.2 billion, which is a lot considering HP’s total stockholders’ equity is only $23.3 billion. Still, since Meg Whitman took over, HP has significantly improved its debt situation. Whitman became CEO of HP in September 2011, which was during HP’s Q4 FY 2011. Check out the following table.

Q1-13 Q4-12 Q3-12 Q2-12 Q1-12 Q4-11
Total Debt (millions $) 28,227 28,436 29,744 30,077 30,900 30,634

Since taking over in Q4 FY 2011 from Apotheker, Whitman has reduced the company’s total debt by about $2.4 billion. In the company’s earnings release, Whitman stated, “…in the quarter, we improved our operating company net debt position for the fourth successive quarter by more than $1 billion to $4.7 billion. We’ll continue to take this approach and focus on rebuilding our balance sheet.” One of the things Whitman did well at eBay Inc (NASDAQ:EBAY) was keeping the company’s balance sheet clean, and she is providing that focus in HP.

Regardless, Hewlett-Packard Company (NYSE:HPQ) still has a negative tangible book value per share of $6.11. Tangible book value is the same as book value, except it ignores intangible assets like goodwill. In the case of HP, this is a better metric to use because the company has overpaid for acquisitions and has written down goodwill multiple times (e.g. Autonomy, EDS, etc). Taking into account the negative tangible book value, HP is worth about $25 per share.

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