HPQ A Good Buy At Current Prices
According to an article on TheStreet.com, shares of the world's largest PC maker Hewlett-Packard (NYSE: HPQ) have tumbled 12% since the company announced its $1.2 billion acquisition deal with Palm Inc (NASDAQ: PALM) at the end of April. That is the second-worst performance of any Dow member, the worst being American Express (NYSE: AXP), which has shed 13% since then.
HP generates sufficient free-cash flows in one quarter to buy the pioneer of smartphones outright. Therefore, investors should not concern themselves with the price paid for Palm. Additionally, analysts are expecting HP to report quarterly earnings growth of 22% when the company reports tomorrow, led by the demand for personal computers and servers for businesses. HPQ’s revenue is estimated to jump 9%.
Despite the decline in the stock-price over the past two and a half weeks, Hewlett-Packard has jumped 35% over 12 months, as compared to a 30% gain in the S&P 500. The company is still attractive based on valuation. While its PEG ratio is mere 0.8, its forward price-to-earnings ratio is 11.1, versus the industry average 17.
In fiscal 2009, HP had a cash balance of $13.5 billion on free-cash flow of $9.6 billion. Free-cash flow amounted to $1.6 billion in the first three months of 2010. Thus, the $1.2 billion price for Palm seems to be insignificant.
Both PALM and HP are going to benefit greatly from the acquisition. PALM was almost out of money and HP will provide it the power to push its consumer technology into the spotlight.
TheStreet.com Ratings' model has given HPQ a "buy" rating, with a grade of B. Shares of PALM closed at $5.68 on Friday, while HP finished at $37.56.
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