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HP CEO Meg Whitman (LUCY NICHOLSON/REUTERS)
HP CEO Meg Whitman (LUCY NICHOLSON/REUTERS)

Stock to watch: Hewlett-Packard a bargain despite recent gains Add to ...

Hewlett-Packard Co.: HPQ-N

Tuesday’s close: $21.11 (U.S.)

52-week trading range: $11.35 to $24.05 a share

Annual dividend: 53 cents for a yield of 2.5 per cent

Analysts’ ratings: There were six buys, 20 holds and 10 sells, according to Bloomberg data. Target prices ranged from $12 as estimated by analysts at Topeka Capital Markets and Deutsche Bank, to $29 a share by Sanford C. Bernstein analyst Toni Sacconaghi. The average target is $19.29 a share.

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Recent history: After enduring a roller-coaster ride, shares of the Palo Alto, Calif.-based personal computer giant are basically flat over the past year. Its stock, however, has been roiled in recent years by a revolving door of chief executive officers as its personal computer and printing businesses continued to face competition from smartphones and tablets. Meg Whitman, who took over as CEO in late 2011 after Leo Apotheker’s dismissal, has been cutting costs to get HP back on the growth track. Its stock hit a decade low last November after HP wrote down $8.8-billion in the fourth quarter, largely because of its purchase of British software company Autonomy. HP, whose first-quarter results beat consenus analysts’ expectations, has seen its share price jump 83 per cent since its 52-week low last November. When HP reports second-quarter results on Wednesday, analysts are expecting 81 cents per adjusted earnings per share.

Manager insight: HP shares are a bargain despite their recent price run-up, and the potential upside comes from improving margins, says Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc.

Profit margins “got destroyed” in every division, including its information technology services unit, amid all the changes in the corner office, he recalled. If the second-quarter results indicate that the downward trend in margins is stabilizing, “that alone will be positive” in the eyes of the Street, he noted.

Mr. Steinberg, who bought HP stock last November at $13.80 a share and would buy more for new clients, expects the company to beat analysts’ expectations for the second quarter. HP has given guidance of 80 cents to 82 cents for the quarter, and the Street is basically taking that guidance because “there are so many moving parts, and this thing is so murky,” he said.

Last October, Ms. Whitman, who warned of a tough 2013 with declining revenue, “set the bar very low,” he noted. “[HP] have positioned themselves to have everyone expect the worst,” he said. “But we are expecting some margin improvement from their guidance, and that positive free cash flow will continue.”

Despite its woes, HP is a global player company with $120-billion in revenue that has a “great brand” and a strong balance sheet, he said. The company looks to be “stabilizing,” and is trying to offset declining PC sales with offerings like its “hybrid” laptops with lids that pop off to become a standalone tablet, he noted.

He bought HP shares last fall because they were “compellingly cheap.” At the time, his firm’s research indicated HP’s information technology business alone was worth at least $14 a share, he said. “The break-up value of this company is worth $35, and probably closer to $45 a share.”

Using the low end of HP’s fiscal 2013 earnings per share guidance at $3.40 a share, “I have a stock that is trading at about six times earnings,” he said. “That’s pretty cheap. We think that earnings will be accelerating significantly over the next few years....and the stock will trade in 2013 for $30 a share.”

The risk to the HP story is executing on the turnaround, Mr. Steinberg acknowledged. “That is not so simple, but we think that the worst is over, and that they are on the right track.”

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