Technology giant Hewlett-Packard (NYSE:HPQ) is opening up a hardware research and development operation in Beijing. While this China foray might signal it’s time to buy H-P shares, it appears more reasons exist to avoid the stock for now.
Why buy? Here are three favorable factors:
- Good five-year income statement. H-P has posted respectable financial results. Over five years, its revenue is a whopping $128 billion, growing at 7.8% average rate since 2006 and its net income of $9.2 billion has risen at an impressive 29.6% average annual rate over the
last five years. - Growth in Economic Value Added. H-P is generating a positive return for its capital providers. After all, it’s producing slightly positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In
2010, H-P’s EVA momentum was 1%, based on 2009 revenue of $114.6 billion, and EVA that grew from $1.1 billion in 2009 to $1.7 billion in 2010. - Expansion into China. H-P plans to open a research center in Beijing this year and will hire an unspecified number of engineers to develop global storage and networking products. H-P gets 12% of its sales, $3.7 billion worth, from so-called BRIC countries — Brazil, Russia, India, and China. But H-P is not new to China. It began operating there in 1985 and about 20,000 H-P workers call China home. This is good news but would not make a huge impact on overall sales.
Why steer clear? Here are five reasons:
- Weakening balance sheet. The company’s balance sheet has actually deteriorated over the last five years. For example, its cash balance has declined at a 9.7% annual rate to $10.9 billion from $16.4 billion in 2006. During that same period, its debt has skyrocketed at a 57.3% annual rate from $2.5 billion to $15.3 billion. And in the last year, its stock has lost 23% of its value.
- Poor second-quarter performance. H-P’s second-quarter performance was disappointing. H-P said its earnings would be $1.08 a share — 12.2% below analysts’ estimates — the second straight quarter that HP missed forecasts, according to Bloomberg.
- Lowered 2011 expectations. H-P also slashed its full-year projections. It cut a billion dollars from its 2011 sales forecast and projected profit would be below analysts’ expectations as consumers shunned PCs and services margins narrowed.
- Fairly expensive stock. H-P’s valuation is just a little pricey — trading at a price-to-earnings-to-growth (PEG) ratio of 1.23 (where 1.0 is considered fairly valued). H-P’s P/E is 8.6 on earnings expected to climb 7% to $5.36 a share in 2012.
- Questionable CEO. Is CEO Leo Apotheker going to work out? Before arriving at H-P late last year, Apotheker resigned as CEO of German software maker SAP (NYSE:SAP). But he left amid falling sales, a union battle over job cuts and a price increase that angered customers. Will this experience help him solve H-P’s problems, or will he end up producing the same results that prompted his departure from SAP?
The reasons not to buy H-P stock outweigh the three that favor it. I would wait until this balance tilts more in H-P’s favor.
Peter Cohan has no financial interest in the securities mentioned.
