Abandon Ship On HP
The current fiscal cliff talks have caused a number of stocks to pull back in value. There are quite a few stocks who have become decent buying opportunities while others have become potentially worthless. One such company is in the technology industry. The company in question is the computer retailer Hewlett Packard Company (HPQ). Is HP a value play right now or a value trap?
The last few years have not been kind to Hewlett-Packard. Since the resignation of CEO Mark Hurd, there have been a number of organizational miscues and mistakes which have hampered the company. CEO Meg Whitman is trying to restructure the company by focusing on its strength in the computer hardware industry while positioning the company to benefit from the opportunity existing in the software market.
Hewlett-Packard is trading at just 3.6 times its forward P/E ratio. The company’s strength is in its balance sheet. The company has an $11 billion dollar cash hoard and has nearly $6 worth of cash for each share. The stock trades at just 0.9 times book value and 0.2 times its sales. Hewlett-Packard trades at 3 times its cash flow. The stock is a great divided pay with its nearly 3.7% yield.
Shares of Hewlett-Packard trade at $13.68 and are very close to their 52 week low. The stock has been pummeled over the last year as the stock is down over 50% years. The bad news for the company is that revenue has grown at a tepid 1.7% over the past three years. Earnings per share, net income, margins, return on equity, and return on assets are all negative. Earnings are projected to fall an additional 10% over the next year and there appears to be no end to the company’s free fall. The company does not expect revenue to grow again until 2016.
Despite its low price, this is still a risky stock. I expect a significant dividend cut to be announced in 2013. It is only prudent for the company to slash its dividend to ensure its long term survival. Share buybacks will likely come to an end as well. The company is a wait and see for long term investors as the future is still too murky for HP.