HPQ

Top 5 Things You Need to Know About HP

It's been a great afternoon session for HP investors, who saw their shares rise 17.5% to a price of $38.53 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.

HP Trades at a Premium:

HP Inc. provides personal computing and other digital access devices, imaging and printing products, and related technologies, solutions, and services worldwide. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 35.0. In contrast, HP has a trailing 12 month P/E ratio of 11.3 based on its earnings per share of $3.41.

There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.

One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.

HP's PEG ratio is 2.52, which shows that the stock is overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.

The Company's Revenues Are Declining:

2018 2019 2020 2021 2022 2023
Revenue (M) $58,472 $58,756 $56,638 $63,460 $62,910 $53,718
Operating Margins 7% 7% 6% 8% 7% 6%
Net Margins 9% 5% 5% 10% 5% 6%
Net Income (M) $5,327 $3,152 $2,815 $6,541 $3,132 $3,263
Net Interest Expense (M) -$818 -$1,354 -$231 $2,209 -$235 -$519
Depreciation & Amort. (M) $528 $744 $789 $785 $780 $850
Diluted Shares (M) 1,634 1,524 1,420 1,220 105 1,000
Earnings Per Share $3.26 $2.07 $1.98 $5.36 $2.98 $3.26
EPS Growth n/a -36.5% -4.35% 170.71% -44.4% 9.4%
Avg. Price $19.69 $17.43 $17.13 $28.41 $35.05 $38.88
P/E Ratio 5.97 8.38 8.61 5.25 11.61 11.82
Free Cash Flow (M) $3,982 $3,983 $3,736 $5,827 $3,672 $2,962
CAPEX (M) $546 $671 $580 $582 $791 $609
EV / EBITDA 7.21 5.61 6.12 5.72 8.0 10.59
Total Debt (M) $5,987 $5,137 $6,217 $8,679 $11,408 $9,842
Net Debt / EBITDA 0.19 0.13 0.32 0.71 1.55 1.56
Current Ratio 0.85 0.8 0.79 0.76 0.75 0.73

HP's financial statements include several red flags such as declining revenues and a flat capital expenditure trend, weak operating margins with a stable trend, and positive cash flows. Additionally, the firm has not enough current assets to cover current liabilities because its current ratio is 0.73. On the other hand, the company has healthy leverage levels working in its favor. Furthermore, HP has flat EPS growth.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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