NEW YORK (TheStreet) -- Hewlett-Packard (HPQ), the world's second-largest personal computer vendor by revenue, will report second-quarter earnings Thursday after the close. Wall Street is not expecting glowing results, largely due to the general decline of the personal computer industry. But that doesn't mean Hewlett-Packard stock isn't a good buy.
Sure, the PC market is no longer growing. But that's not news. PCs stopped being a booming industry years ago as mobile devices and cloud computing have taken over. What's more important to consider is what HP plans to do about it, and where President and CEO Meg Whitman is taking the company. From that standpoint, it's just as risky avoiding Hewlett-Packard as it would be to buy while the shares are dirt cheap.
Consider this: At around $33 per share and down 17% on the year, HPQ today carries a P/E of 12. Not only is that a nine-point discount to the S&P 500, which trades at a P/E of 21, it's also a discount of 11 points compared to the iShares North American Networking ETF (IGN), which has an average P/E of 23. The IGN is home to leading hardware/enterprise vendors like Cisco Systems (CSCO) (P/E of 17) and F5 Networks (FFIV) (P/E of 27).
Not to mention, the stock has gained just 2% in the last twelve months, against more than 13% gains for the S&P 500 (SPX).
What all of this tells us is that there are low expectations for a quick HP recovery. But why is HPQ stock being discounted so deeply? Obviously there's the weak PC environment, pressuring its revenue and profits. And the fact that earnings estimates for the just-ended quarter are down 10% since the quarter began to 86 cents per share certainly hasn't boosted investors' confidence.
But these estimates don't include the value HP can extract by improving its operational focus. And that's likely to happen, given that HP will soon split its businesses into two independent and publicly traded companies. No longer will the struggles of the personal computing and printing operations bleed over into fast-growing areas like the cloud that have better revenue-generating potential.
To that end, it's also possible that investors are discounting the value of HP's recently launched Helion -- its portfolio of cloud products and services. To the extent Helion can compete with Cisco and other cloud vendors, even if it captures only low single-digit percentage market share over the next couple of years, it would still be a success. At that point, the struggles of the PC market may not matter as much to HP's value.
Throw in a key acquisition or two -- and Whitman has hinted she's considering making some -- and growth at HP will become a matter of "when," not "if." In short, HP stock is trading today at a steep discount to its long-term value, regardless of what it reveals in its earnings results Thursday. Add in its 16-cent quarterly dividend, yielding 1.84%, and the risk versus reward ratio tips heavily toward the positive side.