Earnings Analysis: Hewlett-Packard
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Hewlett-Packard (NYSE: HPQ) reports preliminary financial results for the year ended 2012-10-31.
Hewlett-Packard Co. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.
Hewlett-Packard Co.'s analysis versus peers uses the following peer-set: Apple Inc. (AAPL), Microsoft Corp.(MSFT) , International Business Machines Corp. (IBM), Cisco Systems Inc.(CSCO), EMC Corp.(EMC) and Dell Inc.(DELL). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
|Annual (USD million)||2012-10-31||2011-10-31||2010-10-31||2009-10-31||2008-10-31|
|Revenue Growth %||(5.9)||1.7||9.7||(3.2)||13.5|
|Net Income Growth %||(278.8)||(19.3)||14.4||(8.0)||14.7|
|Net Margin %||(10.5)||5.5||7.0||6.7||7.0|
Hewlett-Packard Co.'s current Price/Book of 1.1 is about median in its peer group. HPQ-US's PE multiple is negative now so EBITDA ratios provide better peer comparisons. HPQ-US's share price implies less than peer median growth (Price to Ebitda multiple of 1.8 compared to peer median of 7.8). The market seems to expect HPQ-US's around median rates of return (EBITDA return on equity of 46.0% compared to the peer median of 44.9%) to decline.
The company's profit margins are below peer median (currently -10.5% 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-US's net margin is its lowest relative to the last five years and compares to a high of 7.0% in 2008.
Changes in the company's annual top line and earnings (-5.9% and -278.8% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.
HPQ-US's return on assets is less than its peer median currently (-10.6% vs. peer median 9.3%). It has also had less than peer median returns on assets over the past five years (3.4% vs. peer median 10.2%). This performance suggests that the company has persistent operating challenges relative to peers.
The company's comparatively low gross margin of 25.8% versus peer median of 51.5% suggests that it has a non-differentiated strategy or is in a pricing constrained position. In addition, HPQ-US's bottom-line operating performance is below peer median (pre-tax margins of -9.9% compared to peer median 20.4%) suggesting relatively high operating costs.
Growth & Investment Strategy
HPQ-US's revenues have grown more slowly than the peer median over the last few years (1.7% vs. 8.4% respectively for the past three years) and the stock price's relatively low Price/EBITDA ratio of 1.8 implies relatively low future growth as well (Note: We use Price/EBITDA instead of PE due to negative earnings). Overall, we classify the company's growth expectations as substandard relative to its peers.
HPQ-US's annualized rate of change in capital of -3.6% over the past three years is less than its peer median of 11.4%. 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.
HPQ-US reported relatively weak net income margins for the last twelve months (-10.5% vs. peer median of 15.5%). This weak margin performance and relatively conservative accrual policy (19.4% vs. peer median of 7.0%) 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-US'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.