If we look at Hewlett-Packard Company (NYSE:HPQ)’s inventory versus their current quarter sales, they have the highest percentage of inventory to sales of their peer group. The company with the most efficient use of inventory is Dell, with inventory at 9.65% of current quarter sales. Cisco Systems, Inc. (NASDAQ:CSCO) and EMC come in second and third, with 13.01%, and 19.92% of inventory to sales. Hewlett-Packard comes in last, with a 22.54% inventory to sales percentage.
With potentially too much inventory, it’s possible Hewlett-Packard will see their margins compress further. If the company has to cut prices to clear out this excess, the company will make less money, hurting earnings and cash flow.
Price Cuts To Clear Inventory = Lower Cash Flow
Hewlett-Packard said that operating cash flow increased, but smart investors should do the math themselves. If you look at Hewlett-Packard’s net income plus depreciation, or what I call “core cash flow,” this measure was actually down 13.57% year-over-year.
The only reason the company could report operating cash flow increased, was because of a $686 million lower adjustment in Accounts Payable. Since this adjustment is a non-cash change on the balance sheet, this isn’t the great news the company seemed to think it was.
The Worst Value Of The Bunch
Hewlett-Packard Company (NYSE:HPQ) stock may sell for only 6.5 times earnings, but they also are expected to see EPS contraction in the next few years. The company’s 2.32% yield is well supported with a free cash flow payout of just 14.64%. However, ask yourself this, do you really want a company paying a 2.32% yield that is expecting negative growth?
Dell may be taken private, but I don’t believe at the price that has been put forth. The stock sells for just 9 times earnings, and EPS is expected to grow by 8.43% in the next few years. When you add a 2.26% yield to the mix, the value seems appealing relative to Hewlett-Packard.
Long-term investors should give serious consideration to Cisco and EMC. Both companies lead their industries. Both companies spend a significant amount on R&D, and have leading margins. Cisco Systems, Inc. (NASDAQ:CSCO) pays a 2.56% yield and is expected to grow at 8.4%, and EMC is expected to grow even faster at 13.23%.
The bottom line for Hewlett-Packard Company (NYSE:HPQ) investors is, this rally is probably short lived. A company with low R&D spending, low margins, negative growth, and too much inventory, is just not a bet I would make.
The article 4 Numbers Say This Rally Is Short Lived originally appeared on Fool.com and is written by Chad Henage.
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