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Hewlett-Packard Company (HPQ) Earnings Analysis

Hewlett-Packard Company (NYSE:HPQ) discussed its F3Q 2013 results yesterday. In June this year the company unveiled HAVEn, a big-data analysis product that combined capabilities from multiple acquisitions the company had made earlier. At this year’s HP Discover 2013,  Meg Whitman, CEO spoke about innovations like Moonshot servers which reduce power consumption by 89%. Yesterday, Whitman began the call by saying that “parts of the business like printing, enterprise services, converge storage and software” were making progress. Nonetheless with continued weakness in the PC market, the company’s revenues fell. Today, Hewlett-Packard Company (NYSE:HPQ) shares are trending downwards.

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Based on Hewlett-Packard Company (NYSE:HPQ)’s preliminary financial results for the quarter ended 2013-07-31 we analyze the company relative to its peers (see the end of this post for the peer list). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-07-31 2013-04-30 2013-01-31 2012-10-31 2012-07-31
Revenues 27,226.0 27,536.0 28,416.0 29,905.0 29,386.0
Revenue Growth % (1.1) (3.1) (5.0) 1.8 (4.2)
Net Income 1,390.0 1,077.0 1,232.0 (6,854.0) (8,857.0)
Net Income Growth % 29.1 (12.6) N/A N/A (656.0)
Net Margin % 5.1 3.9 4.3 (22.9) (30.1)
ROE % (Annualized) 23.1 18.6 21.7 (101.5) (97.2)
ROA % (Annualized) 5.2 4.0 4.6 (24.2) (28.9)

Valuation Drivers

Hewlett-Packard Company (NYSE:HPQ)’s current Price/Book of 2.0 is about median in its peer group. Hewlett-Packard Company (NYSE:HPQ)’s PE multiple is negative now so EBITDA ratios provide better peer comparisons. HPQ’s share price implies less than peer median growth (Price to Ebitda multiple of 3.7 compared to peer median of 8.7). The market seems to expect Hewlett-Packard Company (NYSE:HPQ)’s around median rates of return (EBITDA return on equity of 47.2% compared to the peer median of 41.7%) to decline.

The company’s profit margins are below peer median (currently -2.8% 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’s net margin has increased 7.8 percentage points from last year’s low but is still below its five-year average net margin of 3.1.

Substandard Growth Expectations

Hewlett-Packard Company’s revenues have grown more slowly than the peer median over the last few years (1.5% vs. 6.7% respectively for the past three years) and the stock price’s relatively low Price/EBITDA ratio of 3.7 implies relatively low future growth as well (Note: We use Price/EBITDA instead of PE due to negative earnings). Overall, we classsify the company’s growth expectations as substandard relative to its peers.

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