Dow Stocks: HP's Now a 'Buy' More Than Ever
PALO ALTO, Calif. (TheStreet) -- Hewlett-Packard's (HPQ) - Get HP Inc. Report stock has fallen 12% since the world's largest maker of PCs announced the acquisition of Palm for $1.2 billion at the end of April.
That's the second-worst performance of any member of the Dow.
American Express
(AXP) - Get American Express Company Report
, the biggest laggard, has dropped 13%.
The price paid for Palm, a pioneer of smartphones, shouldn't be a concern. Hewlett-Packard has enough free-cash flow in one quarter to buy the company outright.
H-P's Rivals Raise the Bar (Forbes)
In addition, quarterly earnings, scheduled to be released tomorrow, may reveal a 22% increase, powered by demand for personal computers and servers for businesses, analysts say. Revenue is projected to jump 9%. Bellwether technology firm
Cisco
(CSCO) - Get Cisco Systems, Inc. Report
said last week that quarterly earnings soared 63% and expects the recovery to continue at about the same rate in the current quarter.
Even after the stock-price decline in the past two and a half weeks, HP has gained 35% over 12 months, besting the
S&P 500's
increase of 30%.
Hewlett-Packard is still attractive based on valuation. It has a PEG ratio of just 0.8 and a forward price-to-earnings ratio of 11.1 versus the industry average 17.
HP has amassed a cash balance of $13.5 billion on free-cash flow of $9.6 billion in fiscal 2009. Free-cash flow totaled $1.6 billion in the three months through January. Those figures make the $1.2 billion price for Palm seem insignificant. Palm's $391 million in debt will look like a rounding error compared with HP's $15.9 billion in debt.
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The acquisition's benefits to Palm and Hewlett-Packard are great. Palm was almost out of money and didn't have the power to push its consumer technology into the spotlight. HP will provide the juice needed to get the task done.
While Palm was flailing on its own, the smartphone maker will be a formidable opponent to
Research In Motion
(RIMM)
and
Apple
(AAPL) - Get Apple Inc. Report
with the guidance of Hewlett-Packard.
Cisco's earnings release last week showed, however, that beating estimates and possessing a solid balance sheet sometimes isn't good enough. There are concerns the global economy won't hold up as Europe battles a debt crisis. On top of that, the dollar has strengthened versus the euro, eroding earnings for U.S. companies such as Hewlett-Packard.
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Regardless of the short-term effects, Hewlett-Packard has great prospects. Saving Palm wasn't a charity exercise -- the acquisition has been largely underplayed by investors.
HP carries a "buy" rating from
TheStreet.com Ratings'
model, with a grade of B.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.
