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Hewlett-Packard Still Defying Skeptics After Significant Stock Gains

NEW YORK (TheStreet) – Value and growth are two determining factors when making investment decisions. Like beauty, they're in the eye of the beholder. To me, Hewlett-Packard (HPQ - Get Report) was lacking in both.

Here's what I said back in May when HP shares had just reached a (then) 52-week high of $33.90:

Read More: 7 Stocks Warren Buffett Is Selling in 2014

"At best, there shares have corrected from their two-year low. But there has been very little to support the close-to 200% gains, which can only be called an over-correction. Absent clear growth strategies to suggest that real value, HP is a decent short to the $25 level, or 23% lower."

I was wrong.

HP stock, now trading at around $35, is up 27% on the year to date, almost tripling the tech sector's 10% gain, according to Morningstar. Even more remarkable, since the stock bottomed at $11.71 in November 2012, HP has rewarded shareholders with gains of more than 200%. Investors want to know if it's time to cash in. The company reports earnings after the close Wednesday.

Despite the recent gains, these shares are still cheap, trading at just 12 times trailing earnings. Based on 2015 estimates of $3.91 per share, the P/E drops to 9, or 44 points below the industry average. HP should have no problems hitting $40 per share in the next six to 12 months.

To that end, it's important to consider the degree to which CEO Meg Whitman is executing on HP's strengths and whether she can extract more value from ongoing cost reductions.

More important, the bear case for HP is finally over. Selling the stock to lock in a profit is one thing. There's no reason to sell based on HP's future.

HP should continue to benefit from a stabilizing PC market. Market research firm Gartner predicts a significant rebound in 2015. Ranjit Atwal, Gartner’s research director, is looking for a modest 2.6% PC-shipment increase in 2014, going from 308 million units to 316 million, bringing global shipments back to 2013 levels.

This optimism is already shown in HP's numbers. In the most recent quarter, the PC business was actually the company's fastest-growing segment. But Whitman's vision for real growth remains in high-margin areas like the cloud, where the company is looking to supplant Cisco (CSCO) as the industry's leader in infrastructure equipment.

HP recently launched Helion, the company's portfolio of cloud products and services. Up until this point, HP has had (at best) limited cloud traction. Aside from Cisco, HP is trailing enterprise giants like VMware, (VMW) , EMC (EMC) and IBM (IBM) .

Nonetheless, Whitman believes Helion can crack the code of the enterprise's biggest challenges. Helion, which is billed as an integrator of public and private clouds, has the potential to be a game-changer.

Read More: HP Preview: What Wall Street's Saying

And with the total revenue for cloud growing at almost 10% annually ($41 billion in 2013), this can be come a lucrative revenue stream for HP. When you couple this with a revitalized PC environment, HP stands to benefit in more ways than one. This means HP is back to growth and presents excellent value. 

Follow @Richard_WSPB

TheStreet Ratings team rates HEWLETT-PACKARD CO as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HEWLETT-PACKARD CO (HPQ) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 30.94% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • HEWLETT-PACKARD CO has improved earnings per share by 20.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HEWLETT-PACKARD CO turned its bottom line around by earning $2.62 versus -$6.45 in the prior year. This year, the market expects an improvement in earnings ($3.72 versus $2.62).
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Computers & Peripherals industry and the overall market on the basis of return on equity, HEWLETT-PACKARD CO has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • The gross profit margin for HEWLETT-PACKARD CO is currently lower than what is desirable, coming in at 27.20%. Regardless of HPQ's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, HPQ's net profit margin of 4.66% is significantly lower than the industry average.
  • Net operating cash flow has decreased to $2,995.00 million or 15.77% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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