Hewlett-Packard Company: A Quick Post-Earnings Look

Hewlett-Packard Company: A Quick Post-Earnings Look
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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, HPQ shares are trending downwards.

Hewlett-Packard Company: A Quick Post-Earnings Look

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Based on Hewlett-Packard’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’s current Price/Book of 2.0 is about median in its peer group. 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’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 substandardrelative to its peers.

Maintenance Mode

The company’s annualized rate of change in capital of -3.6% over the past three years is less than its peer median of 12.7%. This below median investment level has also generated a less than peer median return on capital of 1.4% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

Hewlett-Packard reported relatively weak net income margins for the last twelve months (-2.8% vs. peer median of 15.5%). This weak margin performance and relatively conservative accrual policy (14.2% vs. peer median of 6.0%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

HPQ’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Quarterly Revenues Trend for Hewlett-Packard (NYSE:HPQ)Annual revenues trend for Hewlett-Packard (NYSE:HPQ)Quarterly Net-Margin Trend Hewlett-Packard (NYSE:HPQ)Annual Net-Margin Trend Hewlett-Packard (NYSE:HPQ)Annual Accruals Trend Hewlett-Packard (NYSE:HPQ)Annual Accruals Trend Hewlett-Packard (NYSE:HPQ)

Peers used for analysis of HPQ

We used the following peer-set: Apple Inc. (AAPL), Microsoft Corporation (MSFT), International Business Machines Corporation (IBM), Cisco Systems, Inc. (CSCO), Dell Inc. (DELL) and Lenovo Group Limited Sponsored ADR (LNVGY).

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