Will HP Continue its 2013 Dominance?

We’ve already mentioned Dell and IBM as potential peers for HP. Dell, fielding buyout offers from a number of parties, experienced double-digit percentage declines in both revenue and earnings in its most recent fiscal quarter versus a year earlier. Investors certainly have considerable upside if a deal is done, and bids might increase over time if multiple parties remain interested in Dell. At a forward P/E of 8 there is some risk if no deal occurs- note that this is a premium to HP despite the more poorly performing business- so it would be important to game out how much lower Dell’s stock would go in that event. IBM has managed to keep its business more stable, with some actual earnings growth derived from higher net margins, but as a result the trailing P/E is 15. The company has been engaged in significant buybacks, and between that and a couple years of continued earnings growth it could have value potential.

HP can also be compared to Microsoft Corporation (NASDAQ:MSFT) and to Accenture Plc (NYSE:ACN). Microsoft trades at 9 times forward estimates, and while that is low we’d be worried that it is based on what would be temporarily higher results stemming from the new versions of Windows and Office. Added to the standard concerns about the sell-side often being too bullish- and the fact that this is actually a premium to HP even with the boost to earnings- and we would avoid it. Accenture has been doing quite well; in its most recent fiscal quarter revenue grew 10% from its levels a year ago and net income rose strongly. The market has priced in some growth- the trailing and forward P/Es are 18 and 16, respectively- but we’d note that this pricing generally implies considerably lower growth rates than what Accenture has been experiencing recently.

So we would be interested in seeing if Accenture can continue to deliver solid growth, and therefore provide undervalued at its current price. HP, even after its rally, does look cheap in terms of guidance for this fiscal year and we would be interested in doing further research to see if it can continue to be “less bad than expected.”

Disclosure: I own no shares of any stocks mentioned in this article.