Market Overview

Earnings Analysis: Hewlett-Packard

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
Revenues 120,357.0 127,854.0 125,682.0 114,552.0 118,364.0
Revenue Growth % (5.9) 1.7 9.7 (3.2) 13.5
Net Income (12,650.0) 7,074.0 8,761.0 7,660.0 8,329.0
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
ROE % (41.4) 17.9 21.6 19.3 21.5
ROA % (10.6) 5.6 7.3 6.7 8.2

Valuation Drivers

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.

Economic Moat

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.

Earnings Quality

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.

Trend Charts

Graph of Revenues Trend for Hewlett-Packard Co.
Graph of Revenues Trend for Hewlett-Packard Co.
Graph of Net Margin Trend for Hewlett-Packard Co.
Graph of Net Margin Trend for Hewlett-Packard Co.
Graph of Accruals Trend (% revenues, Quarterly) for Hewlett-Packard Co.
Graph of Accruals Trend (% revenues, Annual or TTM) for Hewlett-Packard Co.

Company Profile

Hewlett-Packard Co. provides products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses and large enterprises, including customers in the government, health and education sectors. It operates through seven business segments: Personal Systems Group, Services Group, Imaging and Printing Group, Enterprise Servers, Storage and Networking Group, HP Software, HP Financial Services and Corporate Investments Group. The Personal System Group (PSG) segment provides commercial personal computers, consumer PCs, workstations, calculators and other related accessories, software and services for the commercial and consumer markets. The Services segment provides consulting, outsourcing and technology services across infrastructure, applications and business process domains. It serves clients by leveraging investments in consulting and support professionals, infrastructure technology, applications, standardized methodologies and global supply and delivery. The Imaging and Printing Group (IPG) segment provides consumer and commercial printer hardware, supplies, media and scanning devices. IPG is also focused on imaging solutions in the commercial markets. The Enterprise Servers, Storage and Networking (ESSN) segment provides server, storage and networking products in a number of categories. Its integrated solution enables enterprise and service provider clients to deliver HP CloudSystem, the Cloud Service Automation software which offers as a service in a private, public or hybrid cloud environment. The HP Software segment provides enterprise IT management software, information management solutions and security intelligence/risk management solutions. Its solutions are delivered in the form of traditional software licenses or as software-as-a-service. The HP Financial Services (HPFS) segment supports and enhances HP's global product and service solutions, providing a broad range of value-added financial life cycle management services. It enables its worldwide customers to acquire complete IT solutions, including hardware, software and services. The Corporate Investments segment includes Business Intelligence solutions, HP Labs, webOS software and certain business incubation projects. Its Business Intelligence solutions enable businesses to standardize on consistent data management schemes, connect and share data across the enterprise and apply analytics. The company was founded by William R. Hewlett and David Packard in 1939 and is headquartered in Palo Alto, CA.

Disclaimer

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