Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – December 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Hewlett-Packard Corporation (HPQ)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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. The Companyâ€™s offerings include personal computing and other access devices; multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services and consulting and integration services, and imaging and printing-related products and services. In January 2014, Qualcomm Inc acquired a patent portfolio from Hewlett-Packard Company.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$14.19|
|Value Based on 0% Growth||$8.32|
|Market Implied Growth Rate||14.74%|
|Net Current Asset Value (NCAV)||-$13.79|
Balance Sheet – OctoberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Hewlett-Packard CorporationÂ is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, insufficient earnings growth or stability over the last ten years, and the high PEmg and PB ratios. Â The Enterprising Investor is concerned with the level of debt relative to the current assets along with the lack of earnings growth or stability over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities. Â As for a valuation,Â the company appears to be overvaluedÂ after seeingÂ its EPSmg (normalized earnings) drop from $3.22Â in 2011 to only an estimated $0.98 for 2015. Â This level of growth does not support the market’s implied estimate of 14.74% growth, leading the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well belowÂ the price.
Be sure to check out previous ModernGraham valuations of Hewlett-Packard Corporation (HPQ)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Hewlett-Packard Corporation (HPQ)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold aÂ position in Hewlett-Packard Corporation (HPQ)Â at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.