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Hewlett-Packard (HPQ) Is a Buy After Solid Earnings

After its respectable Q2 report, HP needs to improve its fundamentals


Recommendation: B-rated ‘Buy’

Welcome to the Stock of the Day for August 21, 2014. After yesterday’s close, Hewlett-Packard (HPQ) announced a 29% year-over-year drop in Q3 profits. Even so, HPQ shares still rose to a multiyear high after the report. What has investors logging onto HPQ?

Company Overview

HP Hewlett-Packard corporate building
Source: Flickr

With 317,000 employees and $112 billion in annual sales, HP is one of the largest computer companies in the world. Even so, sales and profits have remained flat for some time as more consumers opt for tablet computers over traditional desktop or laptop computers.

Earnings Rundown

During the third quarter Hewlett-Packard earned $985 million, or $0.52 per share, on $27.6 billion in revenue. Compared with Q3 2012, HP had a 29% drop in profits and a 1% increase in sales. The slight uptick in sales breaks a 11-consecutive quarter streak of declining sales. Excluding special items, adjusted earnings were $0.89 per share. Analysts had expected $0.89 earnings-per-share on $27.01 billion in revenue so Hewlett-Packard met earnings estimates and posted a modest sales surprise. Looking ahead to FY 2014, HP now expects to post unadjusted earnings between $2.75 and $2.79 per share and adjusted earnings between $3.70 and $3.74 per share.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For the better part of the past year, HP stock has been able to maintain a “buy” rating thanks to the strong institutional buying-pressure backing it. HPQ currently earns an “A,” but on the fundamentals side, there is room for improvement. Of the eight fundamental metrics I graded HPQ on, three outright failed (sales growth, earnings momentum and earnings surprises).  Hewlett-Packard’s operating margin growth and analyst earnings revisions squeaked by with “Cs.” Earnings growth, cash flow and return on equity earned top marks. Averaging all these grades together, HPQ earns a “C” for its fundamentals.

Bottom Line

As of this posting on August 21, 2014, I consider HPQ a “B’-rated “buy.” My expectation is that some of these low fundamental grades will firm up once the latest earnings data has been plugged in.

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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