Hewlett-Packard Company reported earnings today, which sent the stock down 11%. Hewlett-Packard Company (NYSE:HPQ) posted a decent quarter and guided in-line for FY13. However, there were two negative surprises: (1) a weak January quarter outlook implying a back-end loaded fiscal year which may raise concerns that guidance may need to be lowered in the future and (2) a big $8.8 billion charge on its Autonomy acquisition, as an internal investigation concluded that there was material accounting fraud.
Shaw Wu, an analyst at Sterne Agee went so far as to say that ‘while the write-down is non-cash, it may call into question the credibility of its board of directors.‘
Below we take a look at the good and the bad of the company.
The Good
The Quarter itself was not too bad
Hewlett-Packard Company (NYSE:HPQ) reported a decent October quarter, with $30 billion in revenue and $1.16 in EPS vs. consensus at $30.5 billion and $1.14 in EPS. This compares to implied guidance of $1.15-$1.17 in EPS, when the company guided to $4.05-$4.07 in EPS for FY12. Gross margin came in better at 24.2% vs. expectations of 23.5% due to a favorable software mix and margin improvement in printing and services, offset by competitive pricing in PCs and servers.
Cash Flow
Hewlett-Packard Company (NYSE:HPQ) generated $4.1Bn in cash flow from operations (helped largely by $8.8Bn impairment of goodwill and purchased intangible assets), which may not be sustainable into future quarters. HP continues to focus on rebuilding its balance sheet, lowering net debt by $3.5B, and continues to return cash to shareholders through dividends and stock repurchases.
Guidance Unchanged
Despite lowering F1Q13 EPS vs. the Street materially, Hewlett-Packard Company maintained its FY13 guide for non-GAAP EPS of $3.40-3.60 vs. current consensus of $3.52. First quarter guidance was set at $0.68-0.71 vs. consensus of $0.85 as printing and services margins are poised for declines q/q (runoff of enterprise services revenue in the 1H in particular has a material impact).
Valuation
The stock on a quanitative basis is extremely cheap. The company trades at a P/E multiple of about 4x CY2013 EPS estimates of $3.57. Other metrics, Enterprise Value/EBITDA is close to 3, price to book is approximately 0.83, price to sales is 0.21, Additionally, the stock has a forward dividend yield of 4.10%. If there is any good news, this company should soar. Finally, with a market cap of $23B, the company is a potential acquisition target for a larger tech player, Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) have the cash to buy the company outright.
The Bad
Fraud Investigation
Hewlett-Packard Company filed a case with the SEC and the U.K. serious fraud office, claiming Autonomy had serious accounting improprieties,disclosure failures, and outright misrepresentation prior to HP’s acquisition of the company. HP said it does not currently plan to hold anyone internally liable for these irregularities. Its auditors were also unable to initially find these improprieties at the time of the acquisition and while HP may seek retribution, Wells Fargo Analysts believe resolution will likely take some time.
Guidance, the Bad
HP expects Q1 EPS of $0.68-0.71 below est. Street: $0.85, driven by lower revenues (seasonality and some large account run-offs), lack of some hedging gains, lowering of printer supplies inventories and continued weak demand and pricing pressure in PCs. Though HP maintained its FY2013 EPS guidance of $3.40-3.60, it assumes significant ramp in H2, visibility to which remains low particularly given weak Q1 guidance.
Also – and despite the new products slated to enter the market for the holiday season – HP noted pressures in consumer PCs are expected to linger. The tone of management was more cautious and we still believe the full year guidance appears too optimistic, considering the ramp expected to achieve full year targets throughout the year – which is now quite back-end loaded, per guidance. While Barclays believes that HP can realize significant restructuring savings y/y in FY13 (over $0.50 per share y/y), the savings is still at risk of being absorbed by weaker secular and competitive pressures.
Hewlett-Packard Company (NYSE:HPQ) indicated that “the majority of this impairment charge is linked to serious accounting improprieties, disclosure failures, and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP’s acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term.” The balance of the impairment charge is linked to the recent trading value of HP stock. There will be no cash impact associated with the impairment charge.”
Disclosure: No position
