Hewlett-Packard Company (HPQ) Annual Valuation

moneyCompany Profile (obtained from Google Finance): Hewlett-Packard Company (HP) is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the Government, health and education sectors. Its operations are organized into seven segments: the Personal Systems Group (PSG), Services, the Imaging and Printing Group (IPG), Enterprise Servers, Storage and Networking (ESSN), HP Software, HP Financial Services (HPFS) and Corporate Investments. In March 2012, HP had consolidated PSG and IPG into a Printing and Personal Systems Group. HP continues to report the results of IPG and PSG separately. HP’s offerings include personal computing and other access devices; multi-vendor customer services, including infrastructure technology and business process outsourcing, application development and support services, and imaging and printing-related products and services. In December 2011, the Company acquired Hiflex Software GmbH.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Opinion Overvalued
Value Based on 3% Growth $7.68
Value Based on 0% Growth $4.50
Market Implied Growth Rate 23.67%
Net Current Asset Value (NCAV) -$14.70
PEmg 55.84
Current Ratio 1.11
PB Ratio 2.07

Balance Sheet – 10/31/2013 

Current Assets $50,364,000,000
Current Liabilities $45,521,000,000
Total Debt $16,608,000,000
Total Assets $105,676,000,000
Intangible Assets $34,293,000,000
Total Liabilities $78,407,000,000
Outstanding Shares 1,908,000,000

Earnings Per Share

2013 (estimate) $2.62
2012 -$6.41
2011 $3.32
2010 $3.69
2009 $3.14
2008 $3.24
2007 $2.67
2006 $2.17
2005 $0.82
2004 $1.14
2003 $0.83

Earnings Per Share – ModernGraham 

2013 (estimate) $0.53
2012 $0.12
2011 $3.33
2010 $3.22
2009 $2.79
2008 $2.41


Hewlett-Packard Company is very poorly affected by its negative earnings year in 2012, and it is likely to take a few years before the company becomes suitable for the Defensive Investor or Enterprising Investor.  For the Defensive Investor, the low current ratio, poor earnings stability, lack of earnings growth over a ten year period, and high PEmg ratio are all disqualifiers.  For the Enterprising Investor, the high level of debt relative to current assets, poor earnings stability, and the lack of earnings growth over the five year period are turn-offs.  Value investors seeking to follow Benjamin Graham’s methods should therefore spend some time considering other opportunities, beginning with reviewing ModernGraham’s valuation of Microsoft (MSFT).  As for a valuation, the company’s EPSmg (normalized earnings) have gone from $2.41 in 2008 to an estimated $0.53 for 2013.  This considerable drop in earnings results in a poor valuation from the ModernGraham valuation model, and certainly does not support the market’s implied estimate of 23.67% growth in earnings.  As a result, the company appears to be overvalued currently.

What do you think?  Do you agree that Hewlett-Packard Company is overvalued?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Hewlett Packard Company (HPQ) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill





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