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Hewlett-Packard Company (HPQ): Pzena Still Believes in Turnarounds

Published on June 3, 2013 at 8:16 am by The Motley Fool in News
Richard Pzena founded Pzena Investment Management in 1995 and now has more than $24 billion in assets under management. The firm’s strategy is to rank companies from the cheapest to the most expensive based on current earnings to normal long-term earnings power. Basically, Pzena likes to buy companies that are good businesses selling at low prices. Outlined below are Pzena’s top five stock holdings at the end of the first quarter; let’s check them out (check out Pzena’s portfolio).
Hewlett-Packard Company (NYSE:HPQ)
Tech turnaround
Pzena’s top stock pick was Hewlett-Packard Company (NYSE:HPQ) , making up 5.7% of Pzena Investment’s public-equity portfolio. HP saw an impressive rally last week thanks to a better-than-expected EPS results. HP posted April-ended quarterly results of $0.87 per share, versus analysts’ estimates of $0.81 per share. However, it’s likely that Hewlett-Packard Company (NYSE:HPQ) will continue to see weakness in the interim due to a deteriorating PC market.
Hewlett-Packard Company (NYSE:HPQ)’s restructuring plan is expected to start yielding results over the interim, and is  expected to save $3 billion to $3.5 billion thanks to layoffs in the range of 27,000 to 29,000 employees. HP plans to reinvest these savings into its cloud business.
Longer-term, Hewlett-Packard Company (NYSE:HPQ) expects the enterprise segments to drive future growth, not to mention other initiatives the company plans to focus on, including increasing sales coverage, emerging markets, digital printing and mobile. However, all this will take time. Analysts expect HP’s EPS to be flat over the next five years.

Dying brick-n-mortar

Staples, Inc. (NASDAQ:SPLS) is Pzena’s second-largest stock holding and makes up 3.6% of its portfolio. Staples, Inc. (NASDAQ:SPLS) continues to face competition from the likes of other brick-n-mortar retailers and online retail. Most notably, OfficeMax Incorporated (NYSE:OMX) and Office Depot Inc (NYSE:ODP) are planning to merge in an effort to better weather the decline in brick-n-mortar retail spending.
Not only is competition causing problems for Staples, but the company has also seen a decline in business thanks to poor consumer spending. Sales in 2012 were down 4.2% and comp sales down 5% year-over-year. What’s more is that although Staples, Inc. (NASDAQ:SPLS) appears cheap at 11.5 times earnings, analysts expect the company to only grow EPS at a mere 6.5% annually over the next five years, well below the 12.2% industry average.

Going into 2Q, there were a total of 37 hedge funds bullish the stock. Pzena has the most valuable position worth $523 million, and other notable hedge fund owners include billionaires Donald Yacktman and Ken Griffin’s Citadel Investment Group (see Griffin’s newest picks).

Off the radar
Pzena’s third- and fourth-largest stock holdings are lesser known stocks. TE Connectivity Ltd. (NYSE:TEL) is Pzena’s third-largest stock holding and makes up 3.2% of its portfolio. TE designs and manufactures over 500,000 products for connecting data insider a number of products.
TE saw its sales down some 6% in fiscal 2012 thanks to the economic weakness in Europe, but sales are expected to only be down another 0.5% in fiscal 2013. The longer-term driver should be an increase in auto demand. TE also appears to be rather cheap, with a 15.8 times earnings, compared to Molex’s 20.3 times and Amphenol’s 21.9 times.
Omnicom Group Inc. (NYSE:OMC) is another one of Pzena’s top picks, accounting for 3.1% of its portfolio and being the fourth-largest holding. Omnicom provides professional services to clients, including global advertising, marketing and corporate communications companies.
Omnicom Group Inc. (NYSE:OMC) reported 1Q EPS of $0.76, compared to $0.72 for the same quarter last year. Organic revenue was also up 2.9% year-over-year.  This out-performance is being spurred by continued strong demand in developed markets, such as the U.S. and Latin America. Longer-term, the company expects future growth to come from exposure to emerging markets, including higher ad spending related to the Olympics and upcoming FIFA World Cup.

Deep value super-major

BP plc (ADR) (NYSE:BP) is a Pzena’s fifth-largest holding and makes up 2.9% of Pzena’s 13F portfolio. This oil super-major still has overhang from the Deepwater Horizon incident, with its stock down some 40% over the past five years, compared to the S&P 500 that’s up 20% over the same time period.

BP plc (ADR) (NYSE:BP) has reinstated its dividend since the Gulf of Mexico incident. The stock now offers investors an impressive 4.8% dividend yield. BP trades at the cheapest of all six super-majors at 6.2 times earnings.

BP plc (ADR) (NYSE:BP) had a debt ratio of only 18.7% and $20 billion in cash at the end of 2012, which should help the company remain financially stable even after the Deepwater payout. Notable value investor and billionaire Seth Klarman has serious conviction in BP plc (ADR) (NYSE:BP), with more than 20% of his hedge fund invested in the stock (check out why Klarman loves BP).

Bottom line
Pzena is heavily invested in the Hewlett-Packard Company (NYSE:HPQ) turnaround, however, I’d be cautious on following him into the tech stock just yet. There still appears to be unanswered questions on how HP will transition away from its PC/printer business. I also think the long-term growth opportunities in Staples, Inc. (NASDAQ:SPLS) are limited, while TE and Omnicom Group Inc. (NYSE:OMC) are both solid under-the-radar stock picks. Meanwhile, I also like BP plc (ADR) (NYSE:BP) as a solid value play with an impressive dividend yield.

Marshall Hargrave owns shares of BP plc (ADR) (NYSE:BP). The Motley Fool owns shares of Staples, Inc. (NASDAQ:SPLS).

The article Pzena Still Believes in Turnarounds originally appeared on Fool.com.

Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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