HP Stock Targets $40 & Beyond

on Nov 26, 2014
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HPQ gets thumbs up from stock analysts!

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Hewlett-Packard third-quarter results are in, and they are strong. A series of improvements in the personal computing segment and other cost-cutting measures have paved the way for HP to post these impressive results. Further, big data segments look to be strong growth sectors moving forward and its cloud computing technology, and security components are looking strong. Analysts believe that the focus on HP’s software will allow it to drive its revenue, which largely remains wholly dependent on PCs. The cloud based portfolio of products – known as HP HelionNetwork – offers greater flexibility and security. HP is looking to increase performance by way of this hybrid information technology environment. This bodes well for the short-term financial performance of the company. There are however several concerns that investors have about macroeconomic variables related to the IT sector. A generally slow recovery, flat wages and the threat of recession in Japan and Europe is playing on the stock’s growth prospects.

Strong Growth and Positive Expectations

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By the end of the fiscal year, HPQ shareholders will hold shares of both companies, not only Hewlett-Packard Enterprises. This is perceived to be a positive change for investors, since the diversification into distinct companies will allow each to pursue a strategic policy geared towards maximum profitability, competitiveness and growth. The recent success in this turnaround strategy is wholly attributed to the visionary leadership of CEO Meg Whitman. She will be leading HP Enterprise, while Dion Weisler will be leading the PCs and Printers company. The split will be complete before the end of 2014. Along the way, HP has conducted share buybacks valued at $2 billion. Analysts were expecting revenue to slide 1.2 percentage points year-on-year for the quarter, but in August 2014, HP netted a 1.3% year on year revenue increase – the first time in 11 quarters.

The overall consensus about the future of Hewlett-Packard is positive. While analysts may disagree as to the specific reasons for their bullish approach to the company, technical indicators point to upward growth. As a result, it is not inconceivable that a price in the range of $40 per share could soon be on the cards. On Monday, 24 November, Deutsche Bank issued a buy rating for HPQ. This report is also in line with what economic analysts have been saying about the stock of late. Most readings performed on HPQ are positive, and several analysts have even upgraded their readings on HPQ, making it a strong buy. The fact of the matter is that the fundamentals of the company are sound, and it is undervalued. Much of the rationale for this lies in the perceived risks of breaking HP into two distinct companies. However as pointed out earlier, the benefits of adopting a two-pronged approach to the company’s profitability far outweigh the risks.

The price-earnings ratio of the stock is 14.06, with a forward price-earnings ratio of 9.44. It is interesting to point out that these figures are well below the industry average and the market average. As it stands, traders are going long on HPQ, and are unlikely to dump any stocks after earnings are announced. In the last couple of months 11.5 million HPQ shares have been added to the holdings of various institutions. Viewed holistically, these are all positive signs that point to the continued upward trajectory of HPQ in 2015. The company’s massive restructuring efforts resulted in 55,000 jobs being lost, to cut costs and to drive the company’s profitability. Investors have taken to this like ducks to water. The stock has surged by almost 200% between 2013 and 2014. Viewed in perspective, this is a fivefold increase over the Dow Jones industrial average rise.

HP is continually innovating, by way of new products like 3D printers which are essentially an untapped market. Before its entry into the market, 3D Systems and Stratasys dominated the 3D printing arena. Now HP is ready to enter the 3D printing market with multi-jet fusion technology that will put HP back into #1 position in traditional printing. The enterprise market is a cash cow of unimaginable proportions waiting to be tapped, and if HPQ is able to assist with streamlining this technology beyond its current status, the growth potential is unbelievable. HP claims that these 3D printers are up to 10 times faster than the competition. Initially the 3D printers will use thermoplastics, but in the future ceramics and metal will likely be used. If the company’s projections are correct, the 3D printing market could hit $10 billion within the next five years.

Another innovation developed by HP is Sprout – a combination of a 3D scanner, personal computer and a projector. It has absolutely no competition in the market and it offers the ultimate intuitive and immersive experience. At a retail price of $1,900, it is unlikely to gain traction with the mass-market until the price comes down. The Machine is the final component of the big 3 innovations created by Hewlett-Packard. This is essentially a means of creating a new computing architecture for big data. HP realises that as the volume of data increases, the infrastructure necessary to hold that data – including the power grid – gets bigger and bigger. HP has focused its innovative efforts on creating The Machine – a means of handling massive amounts of data with significantly less power. An HP software defined server – Moonshot – uses 80% less space and 89% less energy. This ground-breaking technology was developed by HP Labs. But there is still time before the machine ships out – 4 or 5 years. Such is the importance of R&D to Hewlett-Packard, that they have increased their budget to 3.1% of company revenue.

Quick Stats on Hewlett-Packard Company (HPQ)

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Heading into the Thanksgiving weekend, Hewlett-Packard was trading at $37.89 per share. The company has a market cap of $70.71 billion, with a price-earnings ratio of 14.24 and earnings per share of $2.66. The dividend & yield is 0.64 – 1.70%. The 52-week trading range for HPQ is $25.09 on the low side and $38.25 on the high side, so it is clear that bullish sentiment is driving the price of the company’s stock. It appears that in Silicon Valley even the old dogs can learn new tricks and lead the pack once again!

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