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HEWLETT-PACKARD CO HPQ
August 21, 2011 - 11:37pm EST by
ladera838
2011 2012
Price: 23.60 EPS $5.01 $5.35
Shares Out. (in M): 2,080 P/E 4.7x 4.4x
Market Cap (in $M): 49,088 P/FCF 0.0x 0.0x
Net Debt (in $M): 12,743 EBIT 0 0
TEV (in $M): 61,831 TEV/EBIT 0.0x 0.0x

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Description

"HP: Down 20%; Now Officially Hated By Almost Everyone."  Thus read the August 19 headline by Eric Savitz on Forbes.com.

In this uncertain stock market environment, investors are reacting emotionally to bad news.  And HPQ announced plenty of bad news on Friday ... (i) writing off a recent billion dollar investment in Palm, (ii) announcing a separation of the PC business without a definite plan or time-line, thus making it a lame-duck enterprise, which can only serve to reduce its eventual value, and (iii) announcing the expensive acquisition of Autonomy, thus constraining HPQ's ability to repurchase more shares at a fraction of the valuation.

Company management has made a series of historical and recent missteps, but the question remains:  what is HPQ worth?  The back-of -the-envelope analysis below (using EBITA, not EBITDA) attempts to answer the following question:

Is there value in HPQ at the current price?

 

 

Oper

Other

    

$ in millions

Earnings

Expenses

EBITA

  
         

Actual - Last Nine Months

        

Current HPQ

        11,156

           (544)

        10,612

  

Personal Systems Group

          1,772

             (86)

          1,686

 

Rest of Current HPQ

          9,384

           (458)

          8,926

  
         

Autonomy Corporation (GM, not OE)

             628

           (325)

             304

 

Total Pro Forma "New HPQ"

        10,012

           (782)

          9,230

  
         
         

Personal Systems Group

          1,772

           (116)

          1,656

  
         

Assumes extra overhead of $30 million for independent PSG and no overhead savings from Autonomy acquisition.

        

Excludes positive impact of closing Palm, which likely lost a large amount of money in this period.

        
         

Estimated - Next Three Months

        

Current HPQ

          3,290

           (244)

          3,046

  

Personal Systems Group

             567

             (42)

             525

 

Rest of Current HPQ

          2,723

           (202)

          2,521

  
         

Autonomy Corporation (GM, not OE)

             223

           (119)

             105

 

Total Pro Forma "New HPQ"

          2,946

           (321)

          2,626

  
         
         

Personal Systems Group

             567

             (52)

             515

  
         

Assumes next quarter equals last quarter for HPQ (below guidance) and Autonomy.

        

Assumes extra overhead of $10 million for independent PSG and no overhead savings from Autonomy acquisition.

        

Excludes positive impact of closing Palm, which likely lost a large amount of money in this period.

        
         

Estimated - 12 Months Ended 10/31/11

      

Current HPQ

        14,446

           (788)

        13,658

  

Personal Systems Group

          2,339

           (128)

          2,211

 

Rest of Current HPQ

        12,107

           (660)

        11,447

  
         

Autonomy Corporation (GM, not OE)

             852

           (443)

             408

 

Total Pro Forma "New HPQ"

        12,959

        (1,103)

        11,856

  
         

Target Multiple - New HPQ

    

            9.3x

 Using IBM EV/EBITA = 9.3x

 Using IBM EV/EBITA = 9.3x

        
         

Implied Enterprise Value

 

 

      110,259

  
         

Total PSG

    

          2,171

  
         

Target Multiple - PSG

    

            3.7x

 Using DELL EV/EBITA = 3.7x

 Using DELL EV/EBITA = 3.7x

        
         

Implied Enterprise Value

 

 

          8,031

  
         

Total Enterprise Value (New HPQ + PSG)

 

      118,290

  
         
 

 HPQ

 Autonomy

 Total

 

Plus: Cash

        12,953

             736

        13,689

  

Less: Debt

      (25,696)

             (66)

      (25,762)

  
         

Cost of Autonomy Acquisition

    

      (11,243)

  
         

Target Market Value

    

        94,973

  
         

Target Share Price

 

 

$45.66

 

# shares

    

          2,080

  

 

The analysis assumes that PSG is spun off tax-free.  If PSG is sold, the tax impact (no more than $2 per share) would be somewhat mitigated by a higher price payable by an acquirer that would presumably have some operating synergies.

Since most of the value derives from the EV/EBITA multiple of the new HPQ,  I have provided a brief sensitivity analysis:

 

 

 

 

Sensitivity Analysis

    

 

 

 New HPQ EV/EBITA

 

            6.0x

            7.0x

            8.0x

 Target Share Price

$26.85

$32.55

$38.25

 

    

 

 

 

 

 

Note that if PSG trades after a spin-off at one half of Dell's multiple, HPQ's value is reduced by $4 billion, or $2 per share.

Finally, please note that I will be on the road this week and unable to respond to questions until next weekend.

Catalyst

Time and/or a change in senior management.  If management can avoid steps that actively destroy value, investors have the opportunity to invest in a long-term franchise company at an attractive entry point.
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