Why HPQ would touch $62 by August 2008

Disclaimer: Please note that I am not a professional stock analyst. Infact, I'm a newbie in this field; your comments/suggestions are most welcome.

I'm going to use two methods to predict HPQ's performance over the course of next 1 year.

1) Simple Extrapolation Method

I downloaded HPQ's financial data from the Google Finance website and then took a quarterly average from Q4 2005 till Q3 2007 (items without background color below). If you recall, Mark Hurd took charge on April 1 2005 (Fool's Day?) and since then HP's performance has been very consistent Quarter over Quarter and Year over Year, consistently beating analysts estimates!

Now, in column A, I've simply extrapolated 4 previous quarter's performance (in bold) to get projections for next 1 year. Since this presents only a very broad picture, I repeated the exercise (column B) to extract the delta (error) between extrapolated values and the real values. It can be seen that the projections are, on an average about 11% lower than the actual stock performance. I've taken this 11% average difference and applied it on the original projections in column A to get somewhat corrected projections in column B (background orange).

Financial Quarter	HPQ Performance: Real and Projected (A)		HPQ Performance: Real and Projected (after applying corrections) (B)	Difference (B - A)/A and Correction (C)
Q4 05	USD 28.18		USD 28.18
Q1 06	USD 30.75		USD 30.75
Q2 06	USD 32.96		USD 32.96
Q3 06	USD 32.58		USD 32.58
Q4 06	USD 38.02		USD 34.97	-8.02%
Q1 07	USD 41.48		USD 36.51	-11.98%
Q2 07	USD 41.99		USD 38.05	-9.38%
Q3 07	USD 46.57		USD 39.59	-14.98%
Q4 07	USD 48.56		USD 53.90
Q1 08	USD 51.17		USD 56.80
Q2 08	USD 53.79		USD 59.70
Q3 08	USD 56.40		USD 62.61

The projected quarterly average estimate for Q3 2008 comes to about $63.

2) Forward P/E Method

a) HPQ's current EPS value = $2.47
b) HPQ's current Share Value = $50.19

Together, this implies, HPQ's current P/E = $50.19/$2.47 = 20.32

Given that EPS (earnings per share) doesn't change everyday, the share price is a function of it's PE ratio. A higher PE reflects a strong market (bullish) outlook for the stock, while a lower one means there are few takers for the particular stock (bearish). Similar tech stocks (such as IBM) typically have their multiple (PE) between 18-22.

Coming to forward PE, according to investopedia.com, Forward P/E is defined as the market share price divided by expected earnings per share. A crude way of deriving earnings guidance is to use forward PE and current share value. So, using the Foward PE of 14.93 from Google Finance, we get:

14.93 = $50.19 / Forward EPS

=> Forward EPS = $50.19/14.93 = $3.36

I'm not sure about Google Finance's FEPS estimation source, so I'm not going to use it for the estimates. From the HP Investor Relationship Earnings Estimate Website, the average EPS estimate for HPQ for Oct-2008 is $3.26. Given that HPQ has been outperforming EPS estimates consistently over the last 2 years, it's very likely that HPQ would atleast meet the average EPS projections for Oct 2008. In August 2008, however, this value should be slightly lower. So, I'm using the lower estimate of $3.15, the stock value should be between $56.7 to $69.3 (i.e. average of $63.00). We got this range by multiplying the estimated EPS with the typical PE band values (18-22).

Conclusion

Under the leadership of Mark Hurd, HPQ has become one of the most consistent tech stocks. If things continue to move as they have been over the last two years, the stock should definitely cross $62 in August 2008 (as estimated by the two methods independently).

An apple to apple (err.. hp) cost comparison

On 7th August 2007 Apple Inc. announced the launch of it's latest line of iMac desktops in 20" and 24" widescreen flavors (along with some software and web tools updates). This new line of desktops is sleeker, more powerful, and a bit cheaper than it's predecessors. Though I don't own an iMac (yet), it's been on my wish-list for a long time and the temptation is only getting stronger by the day.

Now, it's a widely held belief that Apple computers, though aesthetically far superior to their PC counterparts, are quite expensive compared with PCs. With Apple embracing Intel processors in 2006, not only has the line between a Mac and a PC blurred--both use same OEM components, Macs can do Windows, and vice-versa (though the latter option is both illegal and unsupported)--it has also helped Apple in bringing down the Mac's cost quite considerably.

Here's a little cost-analysis of an iMac with the most popular PC vendor (HP) right now (Q3 2007). In order to keep the features comparable, I've created a customized iMac and a customized PC on Apple and HP websites respectively.

	HP Compaq dc7700p USDT	Apple iMac (MA878LL)	Which is Better?
Processor	Intel Core 2 Duo 2.4/1066/4M	Intel Core 2 Duo 2.4/800/4M	PC
Memory	1GB PC2-5300 (DDR2-667)	1GB PC2-5300 (DDR2-667)	Same
Hard Drive	250GB SATA 7200 rpm	320GB SATA 7200 rpm	Mac
Optical Drive	Slim 8X DVD+/-RW Drive	Slot-loading 8x SuperDrive with 4x double-layer burning (DVD±R DL/DVD±RW/CD-RW)	Mac
Graphics	ATI Radeon PCIex16 x1300 DVI-I 256MB Single Head	ATI Radeon HD 2600 PRO with 256MB of GDDR3 memory	Mac
Network	Integrated Intel 82566DM Gigabit Network Connection	Built-in 10/100/1000BASE-T (Gigabit)	Mac
Display	HP LP2465 24-inch LCD Widescreen Flat TFT active-matrix	24-inch (viewable) glossy widescreen TFT activ e-matrix LCD	Mac
Input Devices	HP USB Standard Keyboard HP USB 2-Button Optical Scroll Mouse	Apple Keyboard, and Mighty Mouse	Mac
Firewire	Adaptec FireWire/1394 PCI FH	One FireWire 400 and one FireWire 800 port; 7 watts each	Mac
Ports	Front I/O: (2) USB 2.0, headphone and microphone Rear I/O: (6) USB 2.0, (1) optional serial port (available via ad apter), (1) optional parallel port (available via adapter), (1) optional DVI graphics port (available via DVI ADD2 adapter), (2) PS/2, (1) RJ-45, (1) VGA, audio in/out	Total of five USB 2.0 ports: three ports on computer, two ports on keyboard Headphone/optical digital audio output (minijack) Audio line in/optical digital audio input (minijack)	Depends
Wireless	HP Wireless A+G PCI FH card	Built-in AirPort Extreme (802.11n)2; built-in Bluetooth 2.0+EDR (Enhanced Data Rate) module	Mac
Speaker & Microphone	HP USB Powered Speakers; No Microphones	Built-in AirPort Extreme (802.11n)2; built-in Bluetooth 2.0+EDR (Enhanced Data Rate) module	Mac
Camera	Not Available	Built-in iSight; mini-DVI output port with support for DVI, VGA, S-video, and composite video connections via adapter	Mac
Remote & IR	Not Available	Apple Remote, Built-in IR receiver	Mac
OS	Genuine Windows Vista® Business 64-bit	Mac OS X v10.4.10 Tiger	Mac
Other Software	None	iLife ’08 (includes iTunes, iPhoto, iMovie, iDVD, iWeb, GarageBand), iWork ’08 (30-day trial), Front Row, Photo Booth	Mac
Warranty	HP 3-year (parts/labor/next business day on-site)	90 days of telephone technical support and one year of service coverage at an Apple-authorized repair center.	PC
Shipping	Extra (about $65)	included (free)	Mac
Price	$2,429	$1,799	Mac

As you can see, HP PC scores better in only two areas: front-side bus speed and Warranty. What's more the cost of an iMac is about 75% of a "comparable" PC. Please note that this is only a cost/component comparison. There are tons of sites where you can find other comparisons. The fact that iMac sales have outpaced PC sales in Q3 2007 by a factor of 3:1 definitely hints at the growing affordability of the iMacs.

Howcome a PC is so expensive?

One of the reasons for this I believe is the increased operations cost of the PC vendors. On the HP or even some other PC vendors' website, you will find literally hundreds of options you can use to configure your PC. IMO, this flexibility has a downside to it, as it brings in the added complexity for the vendor, thereby leading to an increased operations cost. More so, when you're the world leader in PC sales. Specifically, the costs associated with increased inventory, management, supply chain, procurement (from various vendors as opposed to a select few) and assembly. iMacs come in 2 basic models -a 20" and a 24", allowing for a few changes to the configuration (again, compared with PCs). Having said this, I'm puzzled by the phenomenon too (do share your opinions/insights).

Why are folks still buying PC's then?

If you've noticed, I've compared 2 high-end desktop configurations here. Well, there's no hidden agenda here, just that I couldn't find any other comparable configurations for this quick-n-dirty comparison. The fact that there are fewer iMac configurations available means that there's less to compare against. A fully-operational iMac or even the basic Mac Mini (one with the usual input peripherals and the cheapest display device) would cost about $1,200. On the other hand, the cheapest fully-functional HP PC costs about $350 and can be assembled by hand. So, if you don't really need an high-end desktop system--and there are plenty of such use case scenarios--buying a PC still makes sense.

Further, though Mac is a very attractive alternative to a PC, a PC would still also be my first choice if I plan to run Linux/BSD on it, mainly because I can assemble a PC cheaper than any Mac (with comparable configuration). Also, I can upgrade a PC easily; not sure if it's possible to upgrade a Mac directly/cheaply.

Conclusion

Today HP and the other PC vendors are being able to leverage the ignorance/perception built around Mac and PCs. (Many folks don't even know that Macs can run Microsoft Office!) If Apple decides to come up with a low-end (student) version of the iMac (not the Mac Mini), and improves it's distribution channels, with a special focus towards the Asian market, it's not long before HP will find a different competitor.

- vvatever