Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Hewlett Packard - Fundamental Research Report


Published on

Compiled a fundamental analysis report of a company. Its past performance and stock price was evaluated and all other factors were assessed. P/E ratios, stock prices, Sales and SWOT analysis was performed. Value line sheet for the company was analyzed to calculate the future performance f the company and a recommendation was made to buy, hold or sell the stock.

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Hewlett Packard - Fundamental Research Report

  1. 1. Hewlett Packard (NYSE-HPQ)TERM PAPERUsman Riaz
  2. 2. SummaryHewlett Packard is recovering from a slum that saw its stock price fell to 10 year low in November 2012.This was mainly due to the acquisition of Autonomy that proved to be overpriced. Hewlett Packard isback and doing great and its stock has gained more than 60% since November 2012. Hewlett Packard isone of the leading global providers of computing and imaging solutions and services for business andhome. The company is focused on capitalizing on the opportunities of the Internet and the proliferationof electronic services. Earnings are expected to rise due to the good outlook of the company.Consequently I find the stock to be growing steadily after a decline and the company doing extremelygood in the market. The recovery power of the stock indicates why long term investors will always beinterested in the stock. I would suggest holding the stock.ConsensusI think there is always going to be a growth in technology based companies. With Hewlett Packard beingone of the leading technological companies in the world it will never have a negative growth.Technology is something that never stops and innovations and inventions are coming out every now andthen. Besides that, there is an upgrade cost for computers and other technology related equipment thatevery company has to bear periodically. So there is one thing for sure that Hewlett Packard has apositive growth.Now the question arises that how much is the growth. For that I have taken in account the currentsituation of Hewlett Packard, its market share, its competitors, and buyer preferences when choosing abrand. The current situation at Hewlett Packard is getting better by the day. The analysts are giving apositive rating to Hewlett Packard and are very hopeful of the stock going up. The market share ofHewlett Packard at this time is the highest in US for PC Vendors and printers. So as reported byInternational Data Corporation, I have used 16.0% as the market share of Hewlett Packard.Growth in Earnings should be moderately growing. Hewlett Packard is doing great in the market and itssales have grown in the current year. The earnings are going to increase given the performancecontinues. Although there are problems that Hewlett Packard is facing in increasing the sales, still it ismore probable that the sales will increase. After a damaging 2012, the recovery has been significant andabove expectations. Taking all these factors and the strong competitors such as Apple, Dell and Lenovoin consideration, I expect the company’s earnings to grow at 3%. This figure seems very suitable to mebecause the growth is restricted but definite, plus the upgrading which is essentials for the clients willalways be there for Hewlett Packard. So new sales, upgrades, service and maintenance will be the mainsources of revenue for the company.Hewlett Packard faces a challenge of being in the industry where it faces some of the fiercestcompetitors. Giants such as Apple, Dell, Lenovo and Samsung are a few names worth mentioning.Hewlett Packard although doing great and having the highest market share in the US, is not the leader
  3. 3. worldwide. So with the situation Hewlett Packard is in, I think Hewlett Packard will show a moderategrowth.IndustryThe computers industry has been one of the most rapidly growing industries of the last two decades.The sales have grown at a multiplying rate. The projected growth is also great and there seems to beever increasing sales. With the new innovations like tablets, the demand for new products neverdecline. The table below shows the past growth in sales of the computers. The past revenue growth ofindustry has been 8% based on the last 4 years average.Table 1.1: U.S. and Worldwide PC Market Growth1975 1980 1985 1990 1995 2000 2005 2010 2015U.S. PC Sales (#M) 0.04 0.76 6.6 9.5 21.4 46.0 62.0 83.8 122U.S. PC Revenue ($B) 0.05 1.5 17.2 24.5 56.8 86.9 90.5 84.0 93U.S. PCs In-use (#M) 0.04 1.4 19 51 86 177 234 296 392Worldwide PC Sales (#M) 0.05 1.1 11 24 58 132 207 325 517Worldwide PC Revenue($B)0.06 3.6 29.5 71 155 251 301 321 383Worldwide PCs In-use(#M)0.05 2.1 33 100 225 529 910 1,425 2,165Source: the rise in sales is not as big as the last 2 decades but still the computers industry is growing insales.Computers industry apparently does not have a significant competitive threat. Computers will always bein use and they might change their shapes from desktops to laptops to tablets but they are inevitable inevery house and office. The threat from new entrants to the personal computer industry is weak to dueto the presence of dominant players who reduce the entry of new players to immediately enter themarket. In such a competitive market, these companies have invested heavily on their research anddevelopment, customer service, and marketing departments.The future growth rate is projected to be about 9%. This is due to the new innovations coming into theindustry. So it an attractive industry to invest in. There are no high risks associated to it as if somethingdramatically disastrous would happen to the industry. There is no direct reliance of the industry onsomething instable. The computers are sure to exist in the coming future and even if a company doesnot do well, the performance of the overall industry is surely going to be relatively stable. The returns onequity seem to be very stable now. It was growing rapidly in the last two decades and has slowed downbut still at a decent level to invest. The risk is moderate to low and the past trend shows that there isnothing to worry about investing in the industry.
  4. 4. CompanyHewlett-Packard Company or Hewlett Packard is an American multinational information technologycorporation headquartered in Palo Alto, California, United States. Founded in 1939 by Bill Hewlett andDave Packard, Hewlett-Packard Co. is a global provider of products, technologies, software solutions,and services to individual consumers, small- and medium-sized businesses and large enterprises,including the public and education sectors. It specializes in developing and manufacturing computing,data storage, and networking hardware, designing software and delivering services. Major product linesinclude personal computing devices, enterprise, and industry standard servers, related storage devices,networking products, software and a diverse range of printers, and other imaging products.The past growth rates in revenues and profits are given in the table below.10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Sales 120,357 127,245 126,033 114,552 118,364Cost Of Goods 92,385 97,529 96,089 87,524 89,921Gross Profit 27,972 29,716 29,944 27,028 28,443Selling & Adminstrative &Depr. & Amort Expenses39,029 20,039 18,465 16,892 17,970Income After Depreciation& Amortization-11,057 9,677 11,479 10,136 10,473Non-Operating Income 0 -695 -505 -721 0Interest Expense 876 0 0 0 0Pretax Income -11,933 8,982 10,974 9,415 10,473Income Taxes 717 1,908 2,213 1,755 2,144Minority Interest 0 0 0 0 0Investment Gains/Losses 0 0 0 0 0Other Income/Charges 0 0 0 0 0Income From Cont.Operations-12,650 7,074 8,761 7,660 8,329Extras & DiscontinuedOperations0 0 0 0 0Net Income -12,650 7,074 8,761 7,660 8,329Source:
  5. 5. As we can see that there was an increase in revenue from 2009 to 2011 of an average 5%. There afterthe revenue declined in 2012 by 6%. The profits for the years 2008 – 2011 have been stable but HewlettPackard suffered a loss in 2012. This was also due to the bad acquisition of Autonomy. The growth rateof Hewlett Packard has been a little lower than that of the whole industry. The main reason that Iidentified is that Hewlett Packard, unlike some other competitors does not make all the products. So itspecializes in the products that it manufactures. But the company is doing well and making a comeback.The new ventures such as cloud computing have proved to be a real success and showing on thecompany’s income statement. The company has reported earnings of 1,232 Million for the first quarterof 2013. This is very impressive considering the poor performance in 2012 and the Autonomy acquisitionthat left the company in trouble.Hewlett Packard is a high quality company. The strength of the stock to bounce back from a slum showsthe ability of the company. The company has been rated BBB+ by most of the big rating companies.SWOTBelow is the SWOT analysis of Hewlett Packard.Strengths:• Brand name recognition is a key strength of Hewlett Packard. People have a high perception ofthe company and it is known for its good quality products.• Has successfully transformed from a B2B only company to a consumer based company. It hasbecome one of the biggest names in the consumer market• One of the 11 most recognizable brands in 2012 Best Global Brands. Source:• Has achieved economies of scale to minimize the cost and maximize profits.• Diversification in 4 different product lines gives Hewlett Packard the advantage over itscompetitors and makes it less dependent on a specific product.• The market share of Hewlett Packard is rated as the highest in US market.• Some very successful acquisitions of Compaq (2002), Mercury Interactive (2006) and ElectronicData Systems Corporation (2008) and 3Com (2010). These all proved to be great moves for thecompany.Weaknesses• Hewlett Packard does not have significant software product and consulting services ascompared to its competitors such as IBM.• Hewlett Packard has always been known for its lack of good account management.Opportunities• Hewlett Packard has invested in cloud computing which is turning out to be a great investment.Hewlett Packard’s SaaS named Hewlett Packard Cloud Assure is already in the market to helpbusiness effectively adopt the cloud based services.• Hewlett Packard can also transform one of its weakness to an opportunity if it start offeringconsulting services like IBM and Accenture.
  6. 6. • Hewlett Packard has been slow in coming into new markets such as tablets. I think tablets are agreat product and Hewlett Packard should be coming up with more models.• Hewlett Packard can also step up into mobile phone markets. Hewlett Packard was one of theleaders in PDA’s and pocket computers in the last decade but somehow has not continued itsadventure and has not taken the challenge of coming into the mobile phone market.Threats• Forecasters predict a decrease in the demand for various IT products. The economic slowdownhas negatively affected many market segments, including information technology. HewlettPackard has experienced this decline not only in the U.S. but also in its global markets comparedto the past.• The competitors of Hewlett Packard are big giants. Hewlett Packard although has the greatestmarket share but it faces severe competition from companies like Dell, Apple, Acer, Lenovo andSamsung. In some parts of the world Hewlett Packard is not even in the top 3 manufacturers. Soto compete with companies like Lenovo which price its products aggressively, Hewlett Packardhas to cut down its profits to stay competitive in the market.• The serious threat that Hewlett Packard and the other tech companies are facing is a rapidtechnological change. Companies are under the pressure to release the new products faster andfaster.FinanceHewlett Packard has a strong balance sheet that has a current assets of $50 Billion. The ratios are alsoshowing that it is liquid. Some of the key ratios are given below. Although not the best in its industry butas a company these ratios depict a relatively strong balance sheet.Current Ratio: 1.09Quick Ratio: 0.66Cash Ratio: 0.24Being such a huge company the cash flows are strong. Although there has been a decline in the cashflow from last years but still the company has a strong cash flow statement.
  7. 7. ValuationRequired Valuation ChartCurrent Next Year Target GrowthYear Year 2 Year 3 RateSales 58.95 60.72 62.54 64..42 3%EPS 2.15 2.21 2.28 2.35 3%DPS 0.55 0.66 0.79 0.95 20%BVPS 13.15 14.70 16.19 17.59 XROE 16.5 15.0 14.1 13.4 XMkt P/E 15 X X 15 XRel P/E 0.65 X X 0.80 XCo P/E 11.0 X X 8.0 XTarget Price 23.64 X X 28.2 XIRR X X X 8.1% XMy projected relative P/E is greater than the present and previous P/E. I have projected this P/E due tothe high market share of Hewlett Packard. The risk is another factor in this. Hewlett Packard stock is alittle risky considering its very sharp increase in the last 1 quarter. Some investors might be thinking thatthe stock has a tendency to go down again but I think the stock will remain stable or increase. So it isvery less risky.For P/E, I have projected that it will be 8. The key factors in the projection were Growth in sales,projected growth in EPS and Projected relative P/E. I think the current Earnings are less than what itshould be so the P/E overvalued. As the earnings per share increases, the P/E will decrease as well. Themarket P/E is 15 so a P/E of 8 is quite acceptable.The stock is not very attractive. The IRR of 8.1% is very moderate and is not something very high. Othercompetitors and the industry has a higher IRR. But anyhow it will still be a good investment in the longrun because there is a very low risk associated with the stock.
  8. 8. The stock has a very low risk associated to it. The Beta of 1 suggests that the movement of stock will becorresponding to the industry’s beta. So the risk is minimal. The earnings are not volatile except for thelast two quarters of 2012. Hence a little risk is still associated to the stock. The balance sheet is still verypowerful and the critical ratios are indicating the strength of the company even in this rebuilding period.So there is a very minimal risk attached to the stock but still it is a good long term investment.
  9. 9. Bibliographywww.valueline.comwww.morningstar.comhttp://www.zacks.com
  10. 10. Value Line Sheet
  11. 11. Balance SheetAll items in Millions except Per Share data.10/31/12 10/31/11 10/31/10 10/31/09 10/31/08AssetsCash & Equivalents 11,301 8,043 10,934 0 10,246Receivables 19,659 21,386 21,467 0 19,242Notes Receivable 0 0 0 0 0Inventories 6,317 7,490 6,466 0 7,879Other Current Assets 13,360 14,102 15,317 0 14,361Total Current Assets 50,637 51,021 54,184 0 51,728Net Property &Equipment11,954 12,292 11,763 0 10,838Investments & Advances 0 0 0 0 0Other Non-Current Assets 10,593 10,755 12,225 0 10,468Deferred Charges 0 0 0 0 0Intangibles 35,584 55,449 46,331 0 40,297Deposits & Other Assets 0 0 0 0 0Total Assets 108,768 129,517 124,503 0 113,331Liabilities & Shareholders Equity 10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Notes Payable 6,647 8,083 7,046 0 10,176Accounts Payable 13,350 14,750 14,365 0 14,138Current Portion Long-Term Debt 0 0 0 0 0Current Portion Capital Leases 0 0 0 0 0Accrued Expenses 18,329 19,112 20,463 0 21,469Income Taxes Payable 846 1,048 802 0 869Other Current Liabilities 7,494 7,449 6,727 0 6,287Total Current Liabilities 46,666 50,442 49,403 0 52,939Mortgages 0 0 0 0 0Deferred Taxes/Income 0 0 0 0 0
  12. 12. Liabilities & Shareholders Equity 10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Convertible Debt 0 0 0 0 0Long-Term Debt 21,789 22,551 15,258 0 7,676Non-Current Capital Leases 0 0 0 0 0Other Non-Current Liabilities 17,480 17,520 19,061 0 13,774Minority Interest (Liabilities) 0 0 0 0 0Total Liabilities 85,935 90,513 83,722 0 74,389Shareholders Equity 10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Preferred Stock 0 0 0 0 0Common Stock (Par) 20 20 22 0 24Capital Surplus 6,454 6,837 11,569 0 14,012Retained Earnings 21,521 35,266 32,695 0 24,971Other Equity -5,162 -3,119 -3,505 0 -65Treasury Stock 0 0 0 0 0Total Shareholders Equity 22,833 39,004 40,781 0 38,942Total Liabilities & Shareholders Equity 108,768 129,517 124,503 0 113,331Total Common Equity 22,833 39,004 40,781 0 38,942Shares Outstanding 1,966.10 1,986.90 2,267.70 2,371.00 2,449.10Book Value Per Share 11.61 19.63 17.98 0.00 15.90
  13. 13. Income Statement10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Sales 120,357 127,245 126,033 114,552 118,364Cost Of Goods 92,385 97,529 96,089 87,524 89,921Gross Profit 27,972 29,716 29,944 27,028 28,443Selling & Adminstrative & Depr.& Amort Expenses39,029 20,039 18,465 16,892 17,970Income After Depreciation &Amortization-11,057 9,677 11,479 10,136 10,473Non-Operating Income 0 -695 -505 -721 0Interest Expense 876 0 0 0 0Pretax Income -11,933 8,982 10,974 9,415 10,473Income Taxes 717 1,908 2,213 1,755 2,144Minority Interest 0 0 0 0 0Investment Gains/Losses 0 0 0 0 0Other Income/Charges 0 0 0 0 0Income From Cont. Operations -12,650 7,074 8,761 7,660 8,329Extras & DiscontinuedOperations0 0 0 0 0Net Income -12,650 7,074 8,761 7,660 8,329Depreciation Footnote 10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Income Before Depreciation & Amortization 12,073 15,546 16,299 14,909 13,829Depreciation & Amortization (Cash Flow) 23,130 5,869 4,820 4,773 3,356Income After Depreciation & Amortization -11,057 9,677 11,479 10,136 10,473Earnings Per Share Data 10/31/12 10/31/11 10/31/10 10/31/09 10/31/08Average Shares 1,974.00 2,128.00 2,372.00 2,437.00 2,567.00Diluted EPS Before Non-Recurring Items 4.05 4.88 4.58 3.85 3.62Diluted Net EPS -6.41 3.32 3.69 3.14 3.25