This morning Hewlett Packard (HPQ) offered preliminary results for the company’s fourth quarter that ended in October. HP expects to report net income of $1.03 per share on revenue of $33.6 billion, with $.19 of earnings coming from the acquisition of Electronic Data Systems. These results beat Thomson-Reuters First Call estimates of $1.00 per share on revenue of $33.09 billion. As the global economy entered what appears to be a worldwide recession, HP grew sales by 19% year-over-year. Other perennial tech leaders such as Cisco (CSCO), Sun (JAVA), Dell (DELL), and Intel (INTC) have warned of an increasingly difficult operating environment going forward because of slowing IT spending, but HP seems to have thus far remained above the fray. The company will officially report results next Monday November 24th, but this news was just too good to keep secret.
HP should be very proud of its continued success in a brutal economy, but the company did not stop there. HP offered upbeat guidance for the year ahead, continuing to project per share earnings of $3.88-$4.03 versus First Call’s estimate of $3.85 for the upcoming fiscal year ending October 2009. It is certainly refreshing to see a tech company both having success in the current environment and remaining confident of its future earnings prospects. Most other tech companies are being defensive and just trying to maintain sales and earnings; HP is not satisfied with stasis and believes that it has the ability to outperform its peers in a rough climate. Thus far in Tuesday’s trading its bullishness is contagious and HPQ is trading nearly 11% higher than yesterday’s close.
Time will tell if HP is out over its skies, but for right now it is breath of fresh air for a company to be realistically optimistic. The technology sector has been particularly affected by the market drop, especially in October. Year to date, the S&P 500’s technology component is down close to 50% and Bloomberg’s IT tracking index has fallen to below 12 times earnings, the lowest level since Bloomberg began tracking the sector more than 13 years ago. We at Ockham Research upgraded HPQ following the massive losses in October because the stock was still fundamentally strong but those fundamentals are supporting a much reduced price (down 37% since the start of October). The stock is also cheap compared to what the market has traditionally been willing to pay for given levels of sales and cash flow. For example, HPQ over the last 10 years has sold for .72x to 1.23x revenue per share, but the current price-to-sales is well below that normal range at .65x. Price-to-cash flow is an even wider difference, as the historically normal range is 10.05x to 18.37x but it’s currently only 5.65x.
HP has shown strength while its competitors are flailing. Sales continue to grow and the acquisition of EDS has started to boost its bottom line. Management continues to cut costs, especially in workforce redundancies from the EDS purchase. What’s more, the company is cash rich, which is a highly sought after attribute right now. We are maintaining our Greatly Undervalued rating for HPQ as it is the class of the technology sector. HP’s Chairman and CEO Mark Hurd said it this way:
“Our ability to execute in a challenging marketplace differentiates HP, enabling it to increase share, expand earnings and emerge from the current economic environment as a stronger force.”