HP Is Going Cheap, But Not Without Risk

Hewlett-Packard (HPQ) has seen better days, but its stock price has likely overreacted to the downside. The last time HP's shares were this low was back in 2005, when its earnings per share were about $1/year. Today, its trailing twelve-month EPS is around $4, giving the stock a P/E of about 6!

But value investors should avoid rushing in blindly, for several reasons. First, this management team is relatively unproven. The manager that grew the company's stature and earnings over the last several years was dumped last year for some improprieties unrelated to the job.

In some businesses, you don't need an all-star team running the show. For example, if you're investing in a business trading at a discount to excess real estate assets, a great manager isn't going to squeeze a lot more out of these assets than a good manager.

But in HP's field, management makes all the difference. Particularly as the company sheds its more stable PC business, HP is focusing in areas where innovation and disruptive technologies are the norm. A key success factor here is your manager.

Finally, the company's capitalization doesn't leave a whole lot of room for error. Following this $10 billion acquisition of Autonomy, the company's debt exceeds its cash by about $24 billion. This is in direct contrast to some of HP's competitors, which have billions of cash in excess of debt. If HP's execution is strong, this isn't a big deal. But if things start to go wrong in the company's fast-changing, risky space, this company won't have as much room to maneuver as will its competition.

HP might do very well in the coming years or it may not; it's difficult to say. But this isn't your father's HP, as the company is shedding its cash cows at the same time as it makes some risky bets. Only investors who can claim that this company falls within their circle of competence should consider entry. Otherwise, you may be buying something that looks cheap but is actually expensive based on its future prospects.

Disclosure: None