Get documents about "Asset Management Ratios Hewlett Packard
Description
Asset Management Ratios Hewlett Packard document sample
Document Sample
The Hewlett Packard
Company
GROUP 7
SPRING 2004
INSTRUCTOR:
PETER HO-WEI HWANG
PRESENTED BY:
FENNY BUI
KAYLA BUI
JONATHAN LUI
BANG NGUYEN
THU PHAM
THU-THUY VU
1
TABLE OF CONTENTS
Backg round Analysis_______________________________________ ___________________ 3
Board of Directors____________________________________________________________ 8
Ownership Info rmation________________________________________________________ 10
Revenues Chart______________________________________________________________ 11
Market Capital Co mparison Chart________________________________________________ 12
Financial Ratios______________________________________________________________ 13
Share Price, Trad ing Volu me and Market Capitalizat ion____________________ __________ 19
Holding Period Return_________________________________________________________ 19
Free Cash Flow and Cost of Equity_______________________________________________ 20
Discounted Cash Flow____________________________________________________ _____ 21
Market Efficiency____________________________________________________________ 22
Specific News_______________________________________________________________ 22
Non-Co mpany Specific News___________________________________________________ 24
Risk Analysis________________________________________________________________ 26
Capital Structure______________________________________________________________27
WACC_____________________________________________________________________ 28
M&M Model________________________________________________________________ 29
5 Years Stock Price Index______________________________________________________ 30
Conclusion__________________________________________________________________ 31
2
Welcome To Hewlett Packard:
Hewlett Packard’s slogan “invent” provides an innovative perspective to its
products. Hewlett Packard delivers vital technology for business and life. The company's
solutions span IT infrastructure, from personal computing and access devices, to global
services and imaging and printing for consumers it enterprises the small and medium
business. Hewlett Packard’s $4 billion annual Research and Development investment
fuels the invention of products, solutions and new technologies, this R&D investment
drives the company to better serve customers and enter new markets. Hewlett Packard
invents, engineers and delivers technology solutions that drive business value, create
social value and improve the lives of customers.
The function of HP lab is to deliver breakthrough technologies and to create
business opportunities that go beyond their current strategies. The majority of HP's
research is conducted in business groups, which develop the products and services to
their customers. HP’s innovative ethic has continued to make new products that change
the everyday lives of their customers. Innovative products that make work less complex,
yet simplifying the tasks of individuals, seem to change people’s lives. This innovative
ethic that Bill Hewlett and Dave Packard has laid a very strong foundation for the
company. This same ethic is used to this day to carry on the company. With the
complexness and competition of today’s market Hewlett Packard has stayed strong and
successful. With HP’s annual 4 billion R&D investment the company and this tactic
will hold Hewlett Packard strong for years to come.
3
History of Hewlett Packard
The 30s
Following graduation as electrical engineers from Stanford
University in 1934, Bill Hewlett and Dave Packard go on a
two-week camping and fishing trip in the Colorado
Mountains during which they become close friends. Bill
continues graduate studies at MIT and Stanford while Dave
takes a job with General Electric. With the encouragement
of Stanford professor and mentor Fred Terman, the two
decide to start a business "and make a run for it" HP's first product, the
themselves. 200A audio oscillator
The 40s
Products from the fledgling company win excellent
acceptance among engineers and scientists. The start of
World War II turns a trickle of U.S. government orders for
electronic instruments into a stream and then a flood. HP
builds the first of its own buildings and adds several new
products. As HP grows, Bill Hewlett and Dave Packard
create a management style that forms the basis of HP's
famously open corporate culture and influences how scores Dave Packard practices
of later technology companies will do business. Dave "management by walking
practices a management technique — which is marked by around"
personal involvement, good listening skills and the
recognition that "everyone in an organization wants to do a good job." As managers, Bill
and Dave run the company according to the principle later called management by
objective — communicating overall objectives clearly and giving employees the
flexibility to work toward those goals in ways that they determine are best for their own
areas of responsibility.
The 50s
4
HP invents the high-speed frequency counter (HP 524A)
and greatly reduces the time required (from about 10
minutes to one or two seconds) to measure high
frequencies. Radio stations use the HP 524A to accurately
set frequencies to comply with FCC regulations for
frequency stability. Over the years, frequency counters and
related products will account for billions of dollars in
revenues. Revenue: $5.5 million. Employees: 215. HP 524A
The 60s
HP continues its steady growth in the test-and-
measurement marketplace and branches out into related
fields like medical electronics and analytical
instrumentation. It also develops its first computer (the HP
2116A), making its entry into that business in 1966.The
company continues its expansion overseas, forming several
subsidiary companies. Early in the decade it expands into
Asia with a Japanese joint venture. In the U.S., HP opens Bill and Dave in 1963
its first manufacturing plants outside Palo Alto.
The 70s
HP continues its tradition of innovation with the introduction of a new
array of computing products. Foremost among them is the HP-35, the
first scientific handheld calculator, which ushers in a new era of
portable, powerful computing. HP continues to look for new
opportunities around the globe, laying the groundwork for an eventual
joint venture with China over the course of several trips by HP
representatives to that country. The decade is marked by significant
growth in earnings and employment, with HP passing the $1 billion
mark in sales in 1976. The company will pass the $2 billion mark
three years later in 1979. Toward the end of the decade, Bill Hewlett
and Dave Packard delegate day-to-day operating management of the
company to John Young. The HP-35, the
world's first
scientific
handheld
The 80s calculator
5
HP becomes a major player in the computer industry in the
1980s with a full range of computers, from desktop
machines to portables to powerful minicomputers. HP also
links computers with its electronic instruments and medical
and analytical products, making them faster and more
powerful. HP makes its entry into the printer market with
the launch of inkjet printers and laser printers that connect
to personal computers. HP's high-quality, inexpensive HP-150 Touchscreen and
inkjet printers spell the end of dot- matrix printers. The HP HP LaserJet
LaserJet printer line, which debuts in 1984, goes on to
become the company's most successful single product line ever. The quality and
reliability of HP's printers make HP a highly recognizable brand by both consumers and
businesses. Near the end of the decade, HP is recognized for its rich past as well as for
its technological advances and products. The garage where the company started is
declared a California historical landmark, and HP celebrates its 50th anniversary.
The 90s
HP is one of the few companies in the world to
successfully marry the technologies of measurement,
computing and communication. The company makes new
advances in portable computing, enters the home-
computing market and continues to invent new printing
and imaging solutions. For most of the decade, HP enjoys
growth rates of 20 percent. HP becomes recognized as a
company whose policies on work- life balance, diversity HP Pavilion
and community involvement help attract and retain top
employees. At the end of the decade, HP spins off its measurement and components
businesses to form a new company, Agilent Technologies. It also brings on board a new
CEO, Carleton (Carly) Fiorina, who focuses the company on reinventing itself for growth
and leadership in the 21st century.
The 21st century
6
At the beginning of the 21st century, HP focuses on
reducing the cost and complexity of information
technology (IT) systems for business and improving the
overall experience consumers have with technology. On
May 3, 2002, HP completes its merger transaction with
Compaq Computer Corp., the largest tech merger in
history. The new HP is a leading global provider of
products, technologies, solutions and services to consumers HP's trading symbol on
and business. The company's offerings span IT the New York Stock
infrastructure, personal computing and access devices, Exchange becomes HPQ
global services, and imaging and printing. on May 6, 2002.
Through Advanced studies in four laboratories HP suceeds
Information Theory
Research in the mathematical foundations and practical applications of information
theory, generating intellectual property and technology for Hewlett-Packard through the
advancement of scientific knowledge in these areas. Research interests include data
compression, sequential decision theory, coding for error correction and modulation and
cryptography. In addition to active collaborations and partnerships with other groups in
HP Labs and HP product divisions, the group maintains close links with the academic
research community, e.g., Technion, Stanford, Berkeley, MSRI.
Quantum Information Processing
Fundamental research in the applications of quantum mechanics to information
processing. The storage, processing and communication of information according to the
laws of quantum physics could enable new technologies such as quantum computers and
quantum communication systems, with capabilities beyond any conventional IT. The QIP
group research interests include theory of various implementations of quantum processors
for communication and computing, quantum software and state and process tomography.
As devices become smaller the principles of quantum mechanics become increasingly
more important. Many new theoretical ideas have emerged and fundamental quant um
physics experiments have progressed in leaps and bounds over the last few years.
Consequently, aspects of genuine Quantum Information Processing could soon begin to
be viable commercially.
Quantum Science Research
Basic research in physical science, with particular emphasis on the fabrication of
nanometer-scale structures and the measurement and understanding of their properties.
This has led to significant invention and discovery in the areas of molecular electronics
and digital ink. Core skills are theoretical physics, materials science, electrical
engineering and chemistry.
Computational BioScience Research
7
Research at the interface between computer science and biology enabled by advanced
computational and experimental technologies. The group's interests include methods for
the efficient processing and interpretation of large datasets in the areas of genomics,
proteomics and biological networks. This is a promising research field that will support
HP's substantial business interests in this fast- growing area.
Taste of the Future
Work in these areas is directed at new, very advanced technologies that show promise
for the future. Projects include an effort to replace silicon technology with chemically
assembled nanocomputers. HPL also conducts basic research in scientific areas of long-
term interest to HP's businesses.
Board of Directors
8
Lawrence T. Babbio, Mr. Babbio has served as Vice Chairman and President of
Jr. Verizon Communications, Inc. (formerly Bell Atlantic
Age 57 Corporation) since 2000. In 1995, he was elected Vice
Chairman of Bell Atlantic. Mr. Babbio has been a director of
Compaq since 1995. Mr. Babbio is also a director of
ARAMARK Corporation.
Philip M. Condit Mr. Condit was Chairman of The Boeing Company, the world's
Director since 1998 largest aerospace company, from February 1997 to December
Age 60 2003. He became Chief Executive Officer of Boeing in April
1996 and a member of its board in 1992. He served as
President of the company from August 1992 until becoming
Chairman.
Patricia C. Dunn Ms. Dunn has been Global Chief Executive of Barclays
Director since 1998 Global Investors (BGI) since 1998 and its Co-Chairman from
Age 48 October 1995 through June 1999. Ms. Dunn oversees the
activities and strategy of BGI, the world's largest institutional
investment manager, having joined the firm's predecessor
organization, Wells Fargo Investment Advisors, in 1978.
Carleton S. Fiorina Ms. Fiorina became Chairman of the Board in September
Director since 1999 2000 and was named President, Chief Executive Officer and
Age 47 director of HP in July 1999She also served as Lucent's
President, Global Service Provider Business and President,
Consumer Products. Ms. Fiorina is a member of the Board of
Directors of Cisco Systems, Inc.
Sam Ginn Mr. Ginn served as Chairman of Vodafone AirTouch Plc from
Director since 1996 1999, following the merger of Vodafone and AirTouch, until
Age 64 his retirement in May 2000. He was Chairman of the Board
and Chief Executive Officer of AirTouch from December 1993
to June 1999. Mr. Ginn is also a director of ChevronTexaco
Corp
+oration and the Fremont Group.
Richard A. Hackborn Mr. Hackborn served as Chairman of the Board from January
Director since 1992 2000 to September 2000. He was HP's Executive Vice
Age 64 President, Computer Products Organization from 1990 until
his retirement in 1993 after a 33-year career with our
company. He is a director of the Boise Art Museum.
George A. Keyworth Dr. Keyworth has been Chairman and Senior Fellow with The
II Progress & Freedom Foundation, a public policy research
Director since 1986 institute, since 1995. He is a director of General Atomics. Dr.
Age 62 Keyworth holds various honorary degrees and is an honorary
professor at Fudan University in Shanghai, People's Republic
of China.
Robert E. Knowling, Mr. Knowling has been Chairman and Chief Executive Officer
Jr. of Internet Access Technologies Inc., a software development
Director since 2000 company specializing in ASP-based productivity suites
Age 46 provided through the Internet, since February 2001. From
July 1998 through October 2000 he was President and Chief
Executive Officer of Covad Communications Company, a
national broadband service provider of high speed Internet
and network access using DSL Technology Mr. Knowling
served as the Executive Vice President of Operations and
Technologies at US WEST Communications, Inc. Mr.
Knowling is a director of Ariba, Inc., Broadmedia Inc.,
9
Heidrick & Struggles International, Inc. and the Juvenile
Diabetes Foundation International. He also serves as a
member of the advisory board for both Northwestern
University's Kellogg Graduate School of Management and the
University of Michigan Graduate School of Business.
Sanford M. Litvack Mr. Litvack is of counsel with the law firm of Dewey Ballantine
Age 65 LLP. Mr. Litvack served as Vice Chairman of the Board of
The Walt Disney Company from 1999 to 2000. From 1994
until his appointment as Vice Chairman, he served as Senior
Executive Vice President and Chief of Corporate Operations.
Prior to joining Disney in 1991, Mr. Litvack was a member of
the Executive Committee and Chairman of the Litigation
Department of Dewey Ballantine LLP. Mr. Litvack has been a
director of Compaq since 2001. Mr. Litvack is also a director
of PacifiCare Health Systems, Inc., Antigenics, Inc., Cyber
Capital and EuroDisney S.C.A.
Thomas J. Perkins Mr. Perkins has been a General Partner of Kleiner Perkins
Age 70 Caufield & Byers, a private investment partnership, since
1972, and has served as either a general or limited partner of
numerous funds formed by Kleiner Perkins Caufield & Byers.
Mr. Perkins served as Chairman of the Board of Directors of
Tandem Computers Incorporated from 1974 until 1997. Mr.
Perkins has been a director of Compaq since 1997. He is
also a director of News Corporation.
Lucille S. Salhany Ms. Salhany has been Chairman of LifeFX, Inc. since March
Age 55 2002. She was Co-President and Chief Operating Officer of
LifeFX Networks, Inc. since 1999. She was President and
Chief Executive Officer of JHMedia from 1997 to 1999. Ms.
Salhany served as President and Chief Executive Officer of
the United Paramount Network from 1994 to 1997. From
1993 to 1994, she served as Chairman of FOX Broadcasting
Company and from 1991 to 1993 she served as Chairman of
Twentieth Century Fox Television. She was a member of the
Board of Directors of Fox, Inc. from 1991 to 1993. Ms.
Salhany has served as a director of Compaq since 1997. Ms.
Salhany is also a director of Boston Restaurant Associates,
Inc.
After reviewing the Board of Directors for Hewlett Packard it can be seen that the
board lacks effective ruling on board meetings. Under one of the rules it states that
directors are expected to attend at least 75% of the Board and applicable Committee
meetings, absent extraordinary circumstances, and to review meeting materials posted on
the Board website in advance of such meetings. This is a good rule but it has a big fault.
It does not state the minimal amount of people that have to be at the meeting. What
happens if 5 members of the board have extraordinary circumstances? W ill the Board
still continue with half the team gone? Unfortunately with the rules stated above, the
meeting will take place leaving important thoughts that could have been addressed.
Hewlett Packard Company
Ownership Information
10
According to the annual financial report of 2003, Shares Outstanding (Public) own 3.05
billion, Institutional Ownership own 39.80 billion, Top 10 Institutional own 19.08 billion,
Mutual Fund Ownership own 27.48 billion, 5 % of Insider Ownership own 6.62 billion.
Finally Float between public, Institutional Ownership, Mutual Fund Ownership, and
Insider own the greatest 93.38 billion. Listed below are the 2 tables that show the detail
of Ownership Information and Institutional Name.
Ownership Information
Shares Outstanding 3.05 Billion
Institutional Ownership (%) 39.80
Top 10 Institutional (%) 19.08
Mutual Fund Ownership (%) 27.48
5% Insider Ownership (%) 6.62
Float (%) 93.38
Institution Name Shs Held Shs Chg %Chg $Chg* %Out %Port Rpt Date
Alliance Capita l Manage ment 127,229,568 13,613,939 12.0 722,864,576 4.2 1.4 12-31-03
Capital Research & Manage ment Co 93,090,624 3,325,000 4.0 400,429,152 3.1 0.7 12-31-03
State Street Globa l Advisors 92,766,400 1,195,598 1.0 358,033,472 3.0 0.5 12-31-03
Dodge & Cox 69,953,840 7,824,962 13.0 404,024,640 2.3 2.7 12-31-03
Vanguard Group 59,242,428 1,886,137 3.0 250,380,784 1.9 0.5 12-31-03
Putna m Invest me nt Mgmt 50,531,360 -9,050,718 -15.0 7,196,302 1.7 1.8 12-31-03
Tiaa Cref Invest me nt Manage ment
25,400,320 1,081,129 4.0 112,625,816 0.8 0.9 12-31-03
Inc
T Rowe Price Associates 24,181,596 3,960,400 20.0 163,968,912 0.8 0.5 12-31-03
Banc Of A merica Capita l
22,165,600 -9,623,659 -30.0 -106,296,224 0.7 3.7 12-31-03
Manage ment
Prime cap Mgmt Co 17,808,104 -4,977 0.0 64,190,900 0.6 1.3 12-31-03
Jennison Associates 17,019,560 -5,973,291 -26.0 -54,202,300 0.6 0.9 12-31-03
Mfs Investme nt Manage ment 13,039,722 -7,346,181 -36.0 -95,148,672 0.4 0.4 12-31-03
New York State Tea chers Retire ment
12,847,404 120,300 1.0 48,708,136 0.4 0.7 12-31-03
Board
Smit h Barney Asset Ma nage me nt 12,306,647 -16,345,280 -57.0 -272,017,632 0.4 0.6 12-31-03
Calpers (ca Public Employees
11,566,000 -1,050,408 -8.0 21,417,360 0.4 1.3 12-31-03
Retire ment Sys)
11
Hewlett Packard Corporation Revenues 2003
(in million)
Corporate
Investments
HPFS 1,921.00
344.00
ESG 15,367.00
IPG 22,569.00
HPS 27,724.00 PSG 21,210.00
IPG PSG HPS ESG HPFS Corporate Investments
Hewlett-Packard Company is a global technology company that operates six business
segments: the Imaging and Printing Group (IPG), the Personal Systems Group (PSG),
the Enterprise System Group (ESG), HP Services (HPS), HP Financial Services (HPFS),
and Corporate Investment.
HPS 22,724 (million)
IPG 22,569
PSG 21,210
ESG 15,367
HPFS 1,921
Corporate Investments 344
Total Revenues (2003) 73,061
According to the table above, it’s ranking from the highest to the lowest. HP Services
generate the greatest revenue for He wlett Packard with the amount of 22,724 million
dollars in 2003, and Corporate Investment contributes the smallest part to the company
revenue with the amount of 344 million dollars in 2003.
12
Hewlett Packard’s Industry
The graphs below show HP’ comparison to the top 4 companies in the computer
networks industry.
Top 4 Competitors
(Market Capital in Hardware Sales)
HPQ
18.78%
IBM
43.86%
CAJ
12.33%
Dell
23.03%
HPQ CAJ Dell IBM
Company Market Capital Percentage of Market
(in Billion) Share
Canon Inc. (CAJ) $ 44.08 B 12.33 %
Hewlett Packard (HPQ) $ 67.13 B 18.78 %
Dell Inc. (Dell) $ 89.48 B 23.03 %
International Business (IBM) $ 156.82 B 43.86 %
Total Market Capital of Top 4 in the $ 357.51 B 100%
industry
Based on the given information above, IBM is ranked first and its percentage of market
share is 43.86%. Dell is ranked second with 23.03% of market share percentage. HP’s
market share percentage is 18.78%, and it is ranked third among large corporations that
do business strictly in the computer industry. Finally is CAJ, it is ranked fourth with
12.33%. This shows that HP, while being very diversified, it is quite strong in
comparison to others.
13
The Hewlett-Packard Company
FINANCIAL RATIOS
Gro wth Rates % Company Industry S&P 500
Sales (Qtr vs year ago qtr) 9.20 -0.40 5.50
EPS (YTD vs YTD) 33.60 26.90 34.20
EPS (Qtr vs year ago qtr) 33.60 NA 1,173.30
Sales (5-Year Annual Avg.) 9.77 2.65 4.76
EPS (5-Year Annual Avg.) NA -36.62 -11.33
Dividends (5-Year Annual Avg.) 0.34 -1.06 1.15
HP's Sales (5-Year Annual Average)
S & P 500
28% Company
Company Industry
Industry 57% S & P 500
15%
*The Hewlett-Packard Sales Growth Rate are a lot higher than the Industry and S&P 500.
The Sales (5-year Annual Average) is also considerably high compare to both the
Industry and the S&P 500 averages. This represents the strength for the company.
Hewlette-Packard is STRONG in their Growth Rates %.
14
Price Ratios Company Industry S&P 500
Current P/E Ratio 25.4 104.7 37.2
P/E Ratio 5-Year High NA 175.7 64.8
P/E Ratio 5-Year Low NA 19.0 25.6
Price/Sales Ratio 0.93 1.51 1.69
Price/Book Value 1.84 3.77 3.46
Price/Cash Flow Ratio 13.80 23.90 18.30
Current P/E Ratio
S &P 500 Company
22% 15%
Industry
63%
Company Industry S &P 500
*The price ratios are important to determine a company’s standing percentages to the
entire market. Used to calculate the ratios are price per share to earnings per share. The
larger the ratio the stronger the company is versus others. The P/E ratios (5-Year High
and 5-Year Low) are not available which can indicate a weakness. The Hewlett-Packard
Current P/E ratio is lower than the S&P 500 and a lot lower than the Industry.
WEAKNESS.
15
Profit Margins % Company Industry S&P 500
Gross Margin 30.8 37.5 47.0
Pre-Tax Margin 3.9 4.5 8.2
Net Profit Margin 3.7 1.5 4.6
5Yr Gross Margin (5-Year Avg.) 30.3 39.5 47.3
5Yr PreTax Margin (5-Year Avg.) 4.3 7.9 8.7
5Yr Net Profit Margin (5-Year Avg.) 3.5 4.9 5.1
Gross Margin
Company
S &P 500 27%
40%
Industry
33%
Company Industry S &P 500
*The Gross Margin for Hewlett-Packard lies just below the Industry level and the S&P
500. However, the Net Profit Margin for Hewlett-Packard is more than double compare
to the Industry and pretty lower than the S&P 500 which represents a FAIRNESS for the
company.
16
Financ ial Condition Company Industry S&P 500
Debt/Equity Ratio 0.17 0.43 1.02
Current Ratio 1.5 1.4 1.5
Quick Ratio 1.0 1.0 1.1
Interest Coverage 14.8 17.0 2.7
Leverage Ratio 2.0 2.8 6.2
Book Value/Share 12.40 8.06 10.52
Debt/Equity Ratio
Company
10%
Industry
27%
S&P 500
63%
Company Industry S&P 500
*The Debt-to-Equity ratio reflects the ability of Hewlett-Packard to pay off debt and is
lower than the Industry. As long as the current ratio is equal to 1, the company is
considered OK. The Hewlett-Packard’s Current Ratio is 1.5, which indicates that the
company can cover its liabilities. Hewlett-Packard is STRONG.
17
Investment Returns % Company Industry S&P 500
Return On Equity 7.4 3.8 9.4
Return On Assets 3.7 1.4 1.5
Return On Capital 6.3 2.6 4.7
Return On Equity (5-Year Avg.) 7.8 13.9 11.0
Return On Assets (5-Year Avg.) 3.8 4.8 1.8
Return On Capital (5-Year Avg.) 6.3 10.4 5.5
Return on Equity
Company
S&P 500 36%
46%
Industry
18%
Company Industry S&P 500
*Return on Equity signifies the ability of stockholders to make money off Hewlett-
Packard’s stock. The company’s ROE is higher than the Industry, which indicates that
Hewlett-Packard’s stock holders are more willing to invest to the company’s stock than
the other companies. The return on equity, assets, and capital look very good for Hewlett-
Packard compared to the Industry and market average. The overall performance of the
company is STRONG.
18
Management Efficiency Company Industry S&P 500
Income/Employee 20,000 5,000 13,000
Revenue/Employee 526,000 336,000 291,000
Receivable Turnover 6.3 4.0 5.4
Inventory Turnover 8.7 10.7 7.9
Asset Turnover 1.0 0.9 0.3
Inventory Turnover
S&P 500 Company
29% 32%
Industry
39%
Company Industry S&P 500
* Compare the Hewlett-Packard’s Inventory Turnover to the Industry’s, it’s pretty lower
than. Thus, we can say, Hewlett-Packard’s products are not selling as fast as the
Industry’s. But the Asset Turnover of Hewlett-Packard is almost the same to the
Industry’s and a lot higher than S&P 500’s. It is a FAIRNESS for Hewlett-Packard.
* The revenue per employee is very good for Hewlett-Packard; it is much higher than the
industry and market average. This shows very high efficiency by employees. The
income average per employee is 4 times as much as the Industry average. These numbers
prove to be a strong indication of the company’s overall wealth. STRENGTH.
19
Listed below are the Share Price, Daily Trading Volume, and Market Capitalization
of HP on Feb 26, 2004:
Share Price = $23.22
Daily Trading Volume = 12.39 mil
Market Capitalization = 70.66 bil
Holding Period Return:
2004 (10/31) 2003 2002 2001 2000
1.Background Analysis:
. HPR = Ending Price – Beginning Price + Distributions 0.2761 0.4323 -0.0422
Beginning Price
Earnings growth rate estimate (10/04) 0.2427
Dividend 0.32 0.32 0.32 0.32 0.32
Price 28.15 22.31 15.8 16.83 46.5
HPR 0.2761 0.4323 -0.0422 -0.6312
(expected)
Hewlett Packard’s HPR in 2002 is -4.22%, until 2003 it is showing a tremendous increase
of 47.45% with an HPR of 43.23%. In 2004, the expected HPR is 27.61%, showing a
decrease of an HPR of 15.62%.
20
HP’s Free Cash Flow For The Last Three Years:
2.Free Cash Flow
and Cost of Equity:
.FCFE
2004 2003 2002 2001 2000 1999
NI 2,539 -903 408 3,697
(+)Deprecitaion 2527 2,119 1,369 1,241
(-)Capital Expenditures 1642 1,348 1,092 1,317
(-)∆ in working capital 2601 4,424 -706 726
(+) ∆ in long-term debt 459 2,306 327 1,638
FCFE 1,593 1,282 -2,250 1,718 4,533
(Mil) (Mil) (Mil) (Mil) (Mil)
Note:
Capital Expenditures 1,642 1,348 1,092 1,317
Additions to property, plant, and equipment 1995 1,710 1,527 1,737
(-) Disposition of property and equipment 353 362 435 420
∆ in w orking capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)] 2,601 4,424 -706 726
CA 40996 36,075 21305 23,244 21,642
CL 26630 24,310 13,964 15,197 14,321
∆ in long-term debt =LTD02-LTD01 459 2,306 327 1,638
LTD 6494 6,035 3,729 3,402 1,764
The cash flow represents some very important facts about a company. Free cash flow is
the amount of money that the company has left over after you take all of its operational
earnings and subtract out all capital expenditures. The remaining amount represents
money that could be paid to investors in the form of dividends and other sorts. In fact,
this is the number that raises interest for investors in a company. As far as the Hewlett-
Packard Company is concerned about cash flow, it is considered one of the rule makers
of cash flow in the whole market. As you can tell by the numbers, the cash flow are
growing very well over the past three years, especially the big change from -9591 Mil
(year 2002) to 1282 (year 2003). This symbolizes great power and positive feedback as
far as investors are concerned.
21
Discounted Cash Flow:
K (Discounted cash flow (DCF) m odel) 2004(1/31) 2003 2002 2001
P0=(FCFE1/Shares0)/(Ke 0-G1) FCFE 12/31/2004 1,593,141,400 1,282,000,000 -2,250,000,000 1,718,000,000
ke 0=[(FCFE1/shares 0)/P0] +G1 shares outstanding 3,000,000,000 3,000,000,000 1,900,000,000 1,900,000,000
G1=(FCFE1-FCFE0)/FCFE0 G 12/31/2004 0.2427 -1.569777778 -2.309662398 -0.62100154
P 1/31/2004 28.15 22.31 15.80 16.83
Ke(required return on equity) 0.261564907 0.266503099 -1.527072914 -2.38002547
Po=D1/(ke-G)=>Ke=(D1/Po) +G 0.014343344 0.020253165 0.019013666
EX: Ke 2001=(D2002/P2001)+g 2002; D2002=D2001(1+g2002); g2002=(D2002 - D2001)/D2001
P = current price
FCFEn = the expected free cash flow to equity in period n
Ke = the required rate of return (discount rate) on equity
GFCFE = the expected constant growth rate
Backed Out Estimate
The growth rate is not constant, so we conclude that the backed out estimate of the
discount rate is unrealistic based on the variance in the current price and the fact that the
estimated growth rates (Ke).
22
Market Efficiency
Company Specific News
Next: 1-yr with Indexes
Customize Chart
01/08/04
HP Expands Small and Medium Business Offering with Fast and Affordable Color LaserJet
Printers
New Color Laser Printers Create High-impact Documents Cost-effectively
SAN FRANCISCO, Macworld, Jan. 7, 2004
HP (NYSE:HPQ) today announced the latest additions to its small- and medium-sized business (SMB)
offering, making HP Color LaserJet printing more affordable than ever before. The HP Color LaserJet
3500 and 3700 series printers bring easy-to-use and reliable color printing into SMB offices without
sacrificing print quality or speed.
The new HP Color LaserJet printers complement the broad portfolio of innovative imaging and printing
systems announced as part of HP's Smart Office initiative for SMBs. Through Smart Office, HP is
delivering products, services and solutions that make technology easy to own for SMBs.
Whether creating internal documents or sales brochures, businesses can rely on the versatile HP
Color LaserJet 3500 and 3700 series printers to provide high-impact, affordable color printing. The
printers offer remarkable output quality and identical color and black & white print speeds with quick,
in-line printing technology.
Both series support Mac OS X and Microsoft Windows® environments. Both are Apple Rendezvous
compatible for quick and easy network connections in a Macintosh environment. The printers will debut
at Macworld SF 2004 at booth 1607.
23
The HP Color LaserJet 3500 series keeps installation, use and maintenance simple. The printer's
automatic media type sensing and print mode adjustment deliver consistently great print quality. At 12
pages per minute (ppm) for both color and black & white, even high-volume printing needs can be
handled in-house. High-yield 4,000-page print cartridges are designed for efficient operation and
minimize user upkeep.
Valuable printer status information is easy to access by the control panel, through the software toolbox
or with the award-winning HP Web Jetadmin printing network management software. With HP Jetdirect
Fast Ethernet print servers, sharing across networks, including wireless networks, is a snap.
This expansion of offering fast and affordable color laser Jet Printers is favorable
news for the company. This expansion gives shareholders more confidence in the
company and it proves the innovation concept that HP highly stresses. According to the
graph it shows the company at the time at a no form of market efficiency. As a result of
this good news the closing stock price rose from $23.36 January the 7 th to $24.69 January
the 8th, a $1.33 increase. But after that date the prices were not stabilize nor kept going
up. The same pattern (fluctuate) was seen the weak after too.
24
Non company specific ne ws
TAX CUT BILL GOES TO BUSH
05/23/03
Friday, May 23, 2003
WASHINGTON (CNN) -- Congress approved a $350 billion package of tax
cuts and economic assistance for states Friday, sending the bill to
President Bush who has promised to sign it into law.
The plan, providing $330 billion in new tax cuts and $20 billion in aid for states, is less than half
the size of Bush's original $726 billion proposal. It is also less than the House's original $550
billion plan.
The cuts are expected to have an immediate impact on many families, with the Treasury
Department expected this summer to begin rolling out checks to give families an advance
payment of the increased 2003 child credit. Other provisions include individual rate cuts, marriage
penalty relief, a cut in the tax on dividends and capital gains, and provisions to help small
businesses. (Full story)
25
A senior Bush administration official said the president will sign the bill sometime after he returns
to Washington from his ranch in Crawford, Texas, on Sunday and before he leaves on a trip to
Europe later in the week.
While the House approved the measure 231-200 early Friday, the Senate vote was 50-50. Vice
President Dick Cheney cast the deciding vote.
Many cuts temporary
To win support for the bill, its backers made much of the tax cut temporary, lowering its overall
cost. For example, an increase in the child tax credit lasts two years and a cut in the capital gains
tax lasts six years.
CNN Capitol Hill Producer Ted Barrett and Correspondents Chris Burns, John King and Kate
Snow contributed to this report.
With Congress’s $350 billion package of tax cuts, it increases the shareholder’s
buying power and produces more confidence in the economy. With the tax cuts it
stimulates the economy thus making the market better. According to the graph it shows
the company at its market efficiency of semi-strong form. Under this form it enables the
company to be greatly affected by outside news such as this tremendous package of tax
cuts. By examining the graph the reader can defiantly see the increase in price until it
stays stable for 2 days. The reason for this is another event occurred stunning the growth
for a short while until it grew more, therefore after the stabilization of the stock price is
weak and it ended up as good news for the company.
26
Risk Analysis:
2004 2003 2002 2001
Risk Analysis: Beta HPQ 1.6573 1.6462 1.5301 1.4885
Beta= COV(RHPQ, RS&P500)/VAR(RS&P500)
Unlevered Beta 0.884628 0.8300337 0.700755435
[Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered
Equity 37746 36,262 13,953
Debt 36962 34,448 18631
Income from continuing operations before income taxes 2888 -1,052 702
Provision for income tax 349 -118 111
Tax rate 0.120845 0.1121673 0.158119658
2004 2003 2002 2001
.Ke (CAPM) Rf 0.009 0.0102 0.0163 0.0386
Ke= Rf + Beta(Rm-Rf) Rm-Rf 0.0133 0.3074 -0.2291 -0.1478
Beta 1.6573 1.6462 1.5301 1.4885
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
K(required return on equity) 0.031042 0.516242 -0.334246 -0.1814003
>The company is currently underpriced because K( DCF m odel) > K(CAPM);0.261564907>0.03104209
Explaination of Calculation:
Beta = COV(RHPQ, R S&P500 ) / VAR (RS&P500 )
Beta_unlevered = [Equity / (Equity + ((1-T) Debt))] * (BetaEquity)
Based on above calculation table, Beta increases 0.0416 from 2001 to 2002,
increases 0.1161 from 2002 to 2003, and increases 0.0111 from 2003 to 2004. Overall,
Beta has been increased more from 2001 to 2003 and slightly increased from 2003 to
2004.
Based on the calculations of company’s cost of equity, the company is currently
under-priced because K( DCF model) > K(CAPM); 0.261564907>0.03104209.
27
Capital Structure of HP Company
2003 Capital Structure
Debt
49%
Equity
51%
Debt Equity
2002 Capital Structure
Debt
49%
Equity
51%
Debt Equity
2001 Capital Structure
Equity
43%
Debt
57%
Debt Equity
For 2001 debt was 57% and equity was 43%. In 2002 and 2003, debt was 49% and
equity was 51%. The capital structure is showing debt has been decreasing in 2002 and it
remained relatively stable in 2003. The company debt at October 2001, 2002, and 2003
include of: US dollar global note, US dollar zero-coupon subordinate convertible note,
Series A medium- term note, Euro medium- term note program, Medium-term note, Note
payable.
28
5. Cost of Capital and Optimal Capital Structure: 2003 2002 2001
.WACC=We*Ke + Wd*kd*(1-T)+ Wp* Kp
We= Equity/(Equity+Debt+Preferred Stock) 0.50525 0.51283 0.428216302
Wd=Debt/(Equity+Debt+Preferred Stock) 0.49475 0.48717 0.571783698
Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0 0 0
Ke 0.2665 0.17 0.13
Kd 0.05748 0.05996 0.059131
Kp 0 0 0
WACC 0.13465 0.11311 0.084132213
EXPLANATIONS OF CALCULATION:
The formulas used to calculate our Weighted Average Cost of Capital (WACC) are as
follows:
WACC=We*Ke + Wd*kd*(1-T)+ Wp* Kp
We= Equity/(Equity+Debt+Preferred Stock)
Wd=Debt/(Equity+Debt+Preferred Stock)
Wp=Preferred stock/(Equity+Debt+Preferred Stock)
The Company had issued Preferred Stock in previous years, but none is currently
outstanding. For 2003, Ke was calculated to be 26.65%, debt was $36,962 mil, and beta
was 1.6462. For 2002, Ke was negative, debt was $34,448 mil, and beta was 1.5301. For
2001, Ke also was negative, debt was $18,631 mil, and beta was 1.4885. Since Ke is
negative for the years 2001 and 2002 under the DCF (Discounted Cash Flow) Model, so
we can not use that Ke to calculate for WACC. Based on beta and debt, we finally have
to assume Ke of 2002 is 17% and Ke of 2001 is 13% because beta and debt of 2001 and
2002 were lower than debt and beta of 2003.
The above calculation shows that WACC has been increased from 2001 to 2003
(0.084132213 of 2001, 0.11311 of 2002, and 0.13465 of 2003).
29
M & M Proposition Chart
HP Capital Structure
0.16
0.1346
0.14
0.12
0.1
WACC
0.1131
0.08 WACC
0.06 0.08413
0.04
0.02
0
0.48 0.5 0.52 0.54 0.56 0.58
DEBT/Total Assets
2001 2002 2003
D/TA 0.5719 0.4872 0.4948
WACC 0.08413 0.1131 0.1346
Cost of Capital and Optimal Capital Structure:
The below equations and formulas were used to calculate the cost of capital
WACC=We*Ke + Wd*kd*(1-T)+ Wp* Kp
We= Equity/(Equity+Debt+Preferred Stock)
Wd=Debt/(Equity+Debt+Preferred Stock)
Since the HP Company does not have preferred stock Wp*Kp was not used.
Capital Structure of the company is the sum of the value of the firm’s debt and the firm’s
equity. The goal of Optimal Capital Structure is to maximize the value of the firm and
minimize the firm’s weighted cost of capital. Model of M & M Proposition: CAN NOT
DECIDE.
30
5-year stock price index
This graph shows Hewlett-Packard stock prices during a 5- year period. HP experienced
its highest stock prices during January, February, and March of the year 2000. The turn of
the century and the Millennium celebrations of 2002, Y2K, may help to explain the rise
of the stock prices as well as the company revenues. Prices were sharply decline since the
mid 2000 until the ending quarter of 2002. This drop was due to several facts: the
September 11 terrorist attacks and state of our nation with fears and cutbacks on
spending, the state of our economy as a whole because compared to other industries, the
price drop was not significant or slowly Hewlett-Packard. Prices slowly going up at the
end of 2002 and quite stable now.
31
Hold, Sell, or Buy HP Stock?
We recommend the stockholders of the company the option to HOLD to
moderate buy. After examining the company ratios, we found that the HP’s overall
growth rate assessment is strong. The Growth Ratio shows a company’s earnings per
share compared to how many shares outstanding. The financial condition and the
investment returns of HP is satisfactory when compared to the industry and S&P 500.
Moreover, it is underpriced, we recommend holding or buying the stock.
Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago
Strong Buy 9 9 8 7
Moderate Buy 1 2 2 3
Hold 12 12 13 12
Moderate Sell 0 0 0 0
Strong Sell 0 0 0 0
Mean Rec. 2.15 2.15 2.23 2.20
Mean Recommendation Conversion Table
1.0 = Strong Buy
1.1 thru 2.0 = Moderate Buy
2.1 thru 3.0 = Hold
3.1 thru 4.0 = Moderate Sell
4.1 thru 5.0 = Strong Sell
32
Strengths and weaknesses of Hewlett-Packard
Strengths of HP:
High Sales and EPS in the growth rate.
High Book Value and Low Debt/Equity Ratio in Financial Condition.
High gross margin and investment returns such as ROE, ROA, and
Return on Capital.
High management efficiency with a income/employee ratio equivalent to more
than three times the industry average and almost double the S&P average.
At this time an under priced stock with ability of growth.
Extremely high free cash flow.
Weakness of HP:
P/E Ratio of HP is less than the industry and S & P 500.
High Beta from 2001 to 2004.
The Holding Period Return for 2003 is 43.23%, and the Expected Holding Period
for 2004 is 27.61%. This positive holding period return indicates an increasing stock
price. This is a STRENGTH for HP. Based on the Financial Ratios, HP has weakness
in Price Ratios, and strength in Growth Rate, Investment Return, Management
Efficiency, and low Debt Equity Ratio. According to the sales growth rate ratio, HP’s
sales are strength verus the Industry and S&P 500 sales ratios. This growth would be
attribute to the fact that expected 2004 revenues are estimated to double in relation to
2003 recorded revenues. HP company is currently under-priced because K (DCF
model)> K (CAPM); 0.261564907>0.)3104209. Free Cash Flow has been increased
from 2002 to 2003, and WACC is slightly increasing from 2001 to 2003. Overall, this
HP company is strong and we recommend holding or buying the stock. However, the
company may face weaknesses, but the strengths outwe igh this proportion in keeping HP
above its competitors. HP’s strong foundation in innovation and reaching out to small or
medium sized businesses has helped HP adapt itself through the change of time.
Creativity empowers Hewlett Packard’s strengths the most, dominating their specific
industry. HP’s forecast is positive for years to come if they continue to focus on these
strengths along with adapting to the changing market in time, while focusing on
minimizing their current internal weaknesses.
33
34
Related docs
Other docs by ypj88685
