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Is Hewlett-Packard Company (HPQ) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Hewlett-Packard Company (NYSE:HPQ) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Hewlett-Packard Company (NYSE:HPQ)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Hewlett-Packard Company (NYSE:HPQ)’s key statistics:

HPQ Total Return Price Chart

HPQ Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% (8.4%) Fail
Improving profit margin (140%) Fail
Free cash flow growth > Net income growth 16.1% vs. (136.5%) Pass
Improving EPS (144.6%) Fail
Stock growth (+ 15%) < EPS growth (48.8%) vs. (144.6%) Fail

Source: YCharts. * Period begins at end of Q2 2010.

HPQ Return on Equity Chart

HPQ Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity (161.3%) Fail
Declining debt to equity 113.4% Fail
Dividend growth > 25% 81.5% Pass
Free cash flow payout ratio < 50% 11.2% Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going

The world’s leading PC manufacturer earns only three out of nine passing grades, and two of those are dividend metrics — what does that tell you about the state of the PC industry? Hewlett-Packard Company (NYSE:HPQ)’s revenue and net income have been decimated over the past few years by slackening computer demand. Consequently, HP tacked on a fairly large amount of new debt in an effort to spend or buy its way out of the problem, which has also cost it a failing grade. Is there any hope left for HP today?

Hewlett-Packard Company (NYSE:HPQ)’s shares tumbled as much as 14% recently after the company issued another disappointing earnings report. Moreover, HP has failed to succeed in the enterprise sector, and that segment’s revenue fell more than 8% in the most recent quarter. Fool contributor Matt Thalman notes that CEO Meg Whitman’s turnaround plan involves shifting HP’s PC-centric business model to a more enterprise-focused structure; but if the company can’t even produce growth there, then where can it grow? “Focus on the enterprise” seems increasingly the mantra of a consumer technology dinosaur, and HP is hardly alone in the desire to gain more corporate customers.

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