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Hewlett-Packard: A Good Value, or a Value Trap?

The third quarter is “going to be another tough quarter”, according to Hewlett-Packard CEO Leo Apothaker. The company has “absolutely no room for profitless revenue or any discretionary spending”. Managers are urged to “watch every penny”.

It comes as no surprise that such a dismal outlook left shares of HP at their lowest level in two years. And details of the company’s earnings report didn’t help. Revenue gained 3%, but that was overshadowed by the ugly reality in the PC segment: revenue from consumer PCs plummeted 23%. And that was even worse than the company’s “cautious” expectations: “…the steepness of our Q2 decline is greater than what we had anticipated”.

Maybe the depth of the decline was a surprise, but the fact that PC revenue is declining is no shock, as consumer demand is shifting. PC sales fell 3.2% in the first quarter, while tablet sales are expected to triple this year, according to research firm IDC.

HP recognizes their failure here: “We have overexecuted operationally and underinvested strategically. This has impacted our ability to create sustainable growth for the long term”. This is a typical problem for large, bloated companies as they “over-invest in what they know, and under-invest in what customers really want” (Forbes).

Still, last week’s action begs the question: is HP a good value now? No one can argue that valuations look pretty good, with the lowest multiple in over a decade (the stock carries a forward PE ratio of 6.3). Based on that alone, HP looks pretty good.

But the real question: is this a value trap? Auriga analyst Kevin Hunt put is simply: the company is “cheap but cheap for a good reason”. And that is reason enough to rethink buying HP now.

The bottom line: I don’t look at this as a buying opportunity, even if it is cheap, and even though the sell-off is overdone. HP is down 14% year-to-date, and down 22% over the past year, while the tech sector is up 26.7%. But the real problem is that indicators signaled a sell late last month, and shares are currently in a long-term downtrend.


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