fiscal second-quarter report after the close Tuesday, outright bullishness is in short supply. Amid broader market weakness and questions about whether H-P can even meet expectations, the stock has lately taken a beating.
Since its last earnings report on Feb. 19, H-P shares have tumbled 18.3% as of Monday's close vs. a 5.5% drop for the
and a 10.6% decline for the S&P Computer Hardware Index.
Some money managers say H-P's stock price travails have turned it into an appealing value play. Largely based on valuations, Matt Kelmon, manager of the
Kelmoore Strategy Eagle fund, said he's more enthused about H-P than by
, although the fund is long both names. He described H-P as "dirt cheap," noting that it trades for less than the value of its printer business.
H-P currently sports a price-to-earnings ratio of 13.3 times estimated earnings, according to Baseline, well below the S&P 500's forward P/E of 16.8. Because they generally boast above-average growth prospects, tech stocks normally enjoy above-market multiples. For example, H-P's rivals Dell and
trade at forward P/Es of 26.5 and 17.0, respectively.
Aside from H-P's relative cheapness, analysts are hard-pressed to drum up much enthusiasm for the stock. Wall Street watchers say H-P's April results will likely show a mixed picture, with expected improvement in computer hardware sales to U.S. companies offset by a relative softening of H-P's European business.
Goldman Sachs analyst Laura Conigliaro, who has a buy rating on the stock, nonetheless predicted that H-P will report a "sloppy" April quarter, with a fair chance of missing the consensus estimate for $19.3 billion in sales on earnings of 34 cents.
Moreover, she said analysts may need to trim their July quarter estimates after Tuesday's report, due in part to a weak euro. Still, Conigliaro believes the beaten-down stock may bounce in such a scenario. She forecasts July quarter revenue of $18.67 billion for the period, slightly below the consensus estimate of $18.7 billion. (Goldman Sachs has done recent investment banking for H-P.)
Not only has the weakening euro proved troublesome for H-P, but Merrill Lynch analyst Steve Milunovich also noted signs that actual European demand may be softening, especially in Germany, even as U.S. enterprise demand improves.
Europe, a key profit center for H-P, supplies more than 100% of its PC profits and offsets the division's small loss in other geographic locations, Merrill estimates.
A more worrisome long-term issue is the increasing competition in H-P's flagship printer business. H-P CFO Bob Wayman has admitted that the 16% operating profits recently seen in the printer arm may retreat over time to the level of 13% to 15%, as H-P faces off against increasing competition from Dell and
If printer-profit growth slows down, investors would want to see better margins in H-P's computer and enterprise divisions. But H-P will likely be hard-put to boost profits in PCs, given what Milunovich calls "relentless pressure from Dell."
In the near-term, he thinks H-P can meet the 34-cent consensus estimate for the April quarter, but he's staying neutral on the stock despite what he calls a "quite compelling valuation." (Merrill Lynch has done investment banking for H-P within the past 12 months.)
Looking further ahead, Fulcrum Global Partners' Robert Cihra has penciled in an estimate of only 30 cents for H-P's current (or fiscal third) quarter -- 2 pennies below the consensus estimate. Cihra cited concerns about business in Europe and a seasonal slowdown in printers. (Fulcrum doesn't do investment banking.)
Cihra has a buy rating on the stock. But, echoing a widespread feeling on Wall Street, he suggested that H-P needs to show better consistency before investors give the company more credit.
Until then, H-P is likely to be stuck with a below-market multiple.