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).