Hewlett-Packard Company (NYSE:HPQ) is up more than 2% as we type, but there is a lot more if S&P Capital IQ has its way. Analyst, A. Zino revised S&P's opinion to a "Strong Buy" recommendation from "Buy" with a price-target of $44 (previously $39). The freshly painted target offers upside of 28% to Zino's mark.
Hewlett-Packard Company, together with its subsidiaries, provides products, technologies, software, solutions, and services to individual consumers, small-and medium-sized businesses (SMBs), and large enterprises, including customers in the government, health, and education sectors worldwide.
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The S&P analyst tell interested investors, "We have greater conviction about stabilization within HPQ's PC and printing markets, which should give it time to execute on new product initiatives in mobility, enterprise and software. We see a better IT spending outlook in calendar year '15 and positively view free cash flow/balance sheet improvement. We see earnings growth aided by cost cutting efforts."
Zino see 2014 EPS of $3.72 (up a penny) and $3.92 for 2015 (up $0.04). Wall Street forecasts earnings of $3.71 and $3.91 for 2014 and 2015, respectively.
Since S&P's call is earnings based, let's take a look at the tech companies recent price-to-earnings (P/E) history to see if $43 is too high, too low, or just about right using Zino's 2015 estimate.
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When profitable since 2009, Hewlett-Packard's P/E range was 5.27 to 16.83 times earnings with an average of 11.26. Today, investors are paying slightly above the norm at 12.11. During the same timeframe, earnings per share actually contracted on an annual basis; falling an average of 3.78% a year.
That means Wall Street has been willing to "pay up" for HPQ's earnings.
According to Zino, Hewlett-Packard's bottom line is expected to grow by 5.72%. Considering investors were willing to pay 11.26 times EPS during down times, it's not unreasonable to see the P/E expand a touch.
To hit S&P's $43 requires a P/E of 10.67, which is below the half-decade average. In fact, using the average and Zino's 2015 estimate delivers a stock price of $44.14, slightly above the analyst's target.
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Using the street's '15 consensus of $3.91 and the average P/E, we get a slightly lower price of $44.03 and right on Zino's target.
Overall: Hewlett-Packard Company (NYSE:HPQ) would hit S&P's $43 target if it trades at its average P/E for the past five-years and hits Wall Street's 2015 consensus earnings forecast.
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