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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Hewlett Packard

March 10th 2011 Hewlett Packard
NYSE Symbol: HPQ
Industry: Tech hardware & software
Price as of 3/10: $41.48

The major averages broke through resistance to the downside this morning even as oil pulled back. The weakest sectors of late have been the techs and commodities. The financials are an interesting sector to watch as the major banks should get favorable stress test results from the government by the end of the month allowing them to once again hike their dividends. With the spike in the market volatility this month, we'll feature a blue chip value stock that should have limited downside. The stock of the week is Hewlett Packard. HP was firing on all cylinders under CEO Mark Hurd. However, the Board of Directors found a way to screw things up by firing the CEO over improper expense reporting last summer. Since then an interim CEO stepped in and the board finally hired a man from Europe who ran SAP for less than a year before getting fired who didn't even have a green card to work in the United States. As you can guess, things have been rocky with the new CEO including disappointing fourth quarter results. Investors aren't taking this news lying down, trying to vote off board members to overhaul the company. If HP investors are successful, the stock has plenty of room to the upside trading currently for less than 8 times earnings and goes ex-dividend on Monday.

Back in February, HP reported a quarterly profit of $2.6 billion, or $1.17 a share, compared with a profit of $2.3 billion, or 93 cents a share, for the year-earlier period. Adjusted income was $1.36 a share beating estimates by 7 cents. Revenue came in at $32.3 billion, up from $31.2 billion in the same period the previous year, but less than analysts expected. For the current quarter, the company said it expects revenue in the range of $31.4 billion to $31.6 billion, and adjusted earnings in the range of $1.19 a share to $1.21 a share. The good news first, the company got a big boost from its enterprise servers, storage and networking business with revenue grow 22% year-over-year. The CEO stated that their gross profit, operating profit, and cash flow from operations all rose faster than revenue, up 10%, 14%, and 20%, respectively, versus revenue growth of 4%, year over year. H-P's imaging and printing business posted year-over-year revenue growth of 7%, while its software business gained only 5%. HP's personal systems group, which covers PCs, saw revenue slip by 1%, weighed down by a soft consumer market. The company's services revenue also dipped 2%. For full fiscal year 2011, the company said it expects revenue in the range of $130 billion to $131.5 billion, and adjusted earnings of $5.20 a share to $5.28. Analysts had expected the company to post earnings of $5.23 a share, on revenue of $132.91 billion, according to a consensus. One analyst theorized that HP lowered revenue guidance for the full year was probably due to moving away from low margin business. But investors had a different opinion selling the stock down 10%.

The recent weakness in HP's stock should be providing a long term buying opportunity. Currently the stock trades for 7.9 times earnings, 7.3 times 2012 earnings, less than one times sales, and 2 times book value. If the stock is bought tomorrow, investors will receive an 8 cent dividend in the first week of April. HP has a long road ahead of them to clean up the mess the Board of Directors created, but the good news is the problems are fixable and with the stock trading for less than 8 times earnings, there is plenty of upside for patient investors.