Hewlett-Packard Was Interesting; Now It's Real Interesting (HPQ)
On Friday, after the close of the New York Stock Exchange, Hewlett-Packard (NYSE: HPQ) announced that its CEO Mark Hurd was resigning following an investigation of a claim of sexual harassment against him that was made by a former contractor. This news rocked Wall Street, sending HPQ shares down as much as 10% in after hours trading.
"The investigation determined there was no violation of HP's sexual harassment policy, but did find violations of HP's Standards of Business Conduct," the company said in a statement. Apparently the violations revolved around the filing of inaccurate expense reports.
The company's Board of Directors has appointed CFO Cathie Lesjak as interim CEO. The board said it has set up a search committee to find a new Chief Executive Officer.
In a statement, Hurd said, "As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at H-P and which have guided me throughout my career."
"This is a painful decision for me to make after five years at H-P, but I believe it would be difficult for me to continue as an effective leader at H-P and I believe this is the only decision the board and I could make at this time," he added.
The company is making every effort to assuage nervous investors. Robert Ryan, the lead independent director at HP., said Mr. Hurd’s departure was not related to any performance issues at the Silicon Valley company. “He has worked tirelessly to improve the value of H.P., and we greatly appreciate his efforts,” Mr. Ryan said.
Furthermore, likely in an effort to cushion the unexpected blow, Hewlett-Packard released preliminary Q3 results, and updated its forward looking guidance.
For its third quarter, HPQ announced preliminary non-GAAP earnings per share of about $1.08, up from previous guidance of $1.05 to $1.07 a share. This compares with Wall Street consensus of $1.07.
Revenue is expected to be $30.7 billion versus previous guidance of $29.7 billion to $30 billion. Analysts' consensus estimates call for revenue of $30.1 billion.
For the fourth quarter, non-GAAP earnings per share are anticipated to be in the range of $1.25 to $1.27 vs. the consensus target of $1.26 a share. Revenue is projected to be in the range of $32.5 billion to $32.7 billion, compared with consensus of $32.63 billion.
For full-year 2010, HPQ sees non-GAAP earnings per share between $4.49 and $4.51 a share, compared with the previous guidance range of $4.45 to $4.50 and the full-year consensus estimate of $4.49 a share.
Full-year revenue is expected to be in the range of $125.3 billion to $125.5 billion compared with analysts' estimates of $124.52 billion.
If HPQ opens Monday morning at around $42, should you buy it? On a valuation basis, the answer is "absolutely." This news is not good, but one person in a company of 304,000 employees is not worth 10% of the market cap, even if it is the CEO. It is overkill. It is too much of a haircut for a blue-chip company like HPQ. The stock may open considerably higher than $42, however, if others come to the same conclusion.
Lets take a look at the valuation, which was already quite inexpensive prior to today's decline. For price, we will assume $42, which is the level the shares have been trading around in the after hours (Doug Kass bought at this level).
Using the lower end of the company's updated FY10 EPS guidance of $4.49 implies a Price/Earnings ratio of around 9.35. That is crazy cheap. Looking ahead, analysts are estimating the company will earn $4.97 in fiscal 2011. Using this figure, we get a forward P/E of 8.45.
Simply put, that is a steal. Hope for $42 (or lower on Monday) and pull the trigger if it happens.
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