Hewlett-Packard Is So 2008 -- a Good Thing

PALO ALTO, Calif. ( TheStreet) -- Hewlett-Packard ( HPQ) has two distinct and mostly uncorrelated business units that drive the majority of revenue for the world's largest maker of personal computers and printers.

The technology-solutions and personal-systems groups have recorded ups and downs over the past year, but they've combined to provide stability for HP, which analysts estimate will post record fiscal fourth-quarter earnings on Nov. 23. Through its dual focus on consumers and businesses, HP has effectively hedged some of the risk out of its operations, which is crucial during a time span that witnessed the longest recession since the 1930s. Dell ( DELL), on the other hand, wasn't as fortuitous.

The two Hewlett-Packard units produce, on average, about $21 billion in quarterly revenue. Their results have been remarkably consistent over the past two years' boom-and-bust. As the consumer market cooled when the recession set in, the technology division picked up the slack. Some of that was due to the acquisition of EDS, which bolstered revenue by about $3.5 billion a quarter. Even without that purchase, the technology subsidiary outperformed the sagging consumer unit, which was hurt by lame demand for personal computers.

The technology-services group benefited from businesses outsourcing to save on staff salaries and other expenses. While spending on major projects by business customers was weak, the crushing effect of the recession was mitigated by customers trying to slash expenses through outsourcing.

Now, with the release of Microsoft's ( MSFT) latest operating system, Windows 7, the consumer division may bounce back as customers who were waiting out the final days of Windows Vista's pathetic life finally spring for a new computer.

Hewlett-Packard is set to release fiscal fourth-quarter results Nov. 23, a period that didn't include Windows 7's release. In the meantime, analysts are expecting earnings of $1.10 a share, a record for any quarter.

Rivals, such as Dell, should also benefit from Microsoft's latest offering, but HP is the best bet in the computing world. Dell's business revenue is less than 25% of the total. Foreign markets account for about 48% of sales.

As Dell shares gained 14% over the past year, HP tacked on 56% and pays a dividend of 0.7%, while Dell pays none.

HP also is cheaper -- its forward price-to-earnings ratio is more attractive at 11.35 versus Dell's 12.

Hewlett-Packard has doubled its long-term borrowings since last year, but they're still in a reasonable range for a technology company. HP has more than $13 billion in cash and a quick ratio of more than 1, indicating a solid liquidity position.

HP should also get a boost from international operations as the dollar continues to drop. The effect will be less pronounced than it will be at other companies such as Coca-Cola ( KO) because of HP's intense hedging. Hewlett-Packard, which conducts more than 60% of its business outside the U.S., hedges interest rates and currencies via derivative contracts with a notional amount of $39.3 billion. Coke's derivative book is valued at about $3 billion. The company had revenue of $31 billion in 2008.

Hewlett-Packard has performed phenomenally well considering the state of the global economy. It's now trading around the pre-crash levels of early 2008. The future looks bright, and HP will profit from higher consumer and business spending. TheStreet.com Ratings gives Hewlett-Packard a "buy" recommendation.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com 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.

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