Is Hewlett-Packard a Strong Buy or Value Trap?

With Hewlett-Packard (NYSE:HPQ) recently making major announcements and currently trading at new multi-year lows, is the blue-chip member a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Earnings Are Increasing Quarter over Quarter?

It is no secret that the PC industry has been suffering amid a growing shift towards more portable and popular gadgets, with companies like Hewlett-Packard and Dell (NASDAQ:DELL) serving as whipping boys. Earnings at Hewlett-Packard have been increasing quarter-over-quarter all year, but decreasing on a year-over-year basis. The company recently announced that its fiscal fourth quarter earnings excluding items came in at $1.16 per share, up from $1.00 a share in the third quarter. In the second quarter and first quarter, H-P earned 98 cents and 92 cents per share, respectively. Compared to last year, fourth quarter earnings declined from $1.17 per share. In the third fiscal quarter of 2011, earnings came in at $1.10 a share.

H-P is conducting a painful turnaround effort, but management appears upbeat. Meg Whitman, president and chief executive officer, explained in the fourth quarter earnings release, “As we discussed during our Securities Analyst Meeting last month, fiscal 2012 was the first year in a multiyear journey to turn H-P around. We’re starting to see progress in key areas, such as new product releases and customer wins. We’re particularly pleased that in Q4, we were able to improve our balance sheet, generating $4.1 billion in operating cash flow, and we returned $384 million to shareholders in the form of share repurchases and dividends.”

However, earnings have been slow to show any improvement, and revenue figures are not making investors feel any better about the future. In the fourth quarter, revenue decreased to $30 billion, a 7 percent decline from the prior year and below analysts’ estimates. For the full fiscal year, net revenue totaled $120.4 billion, down 5 percent from last year. Personal Systems revenue plunged 14 percent year-over-year, while Printing revenue dropped 5 percent.

H = Honest Accounting Governs the Company Books?

The main focus of Hewlett-Packard’s fourth quarter earnings release was a development on par with the blue-screen of death. Alleged accounting “improprieties” at its acquired Autonomy software unit led H-P to a one-time accounting charge of $8.8 billion. The charge is linked to the “associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term,” the company explained in a statement.

Along with the “serious accounting improprieties,” there were also “disclosure failures” and “outright misrepresentations” at Autonomy that occurred prior to its acquisition for $11.5 billion in 2011 and were discovered by a nearly seven-month-long internal investigation. The investigation was launched after a senior member of Autonomy came forward, H-P said.

T = Technicals on the Stock Chart are Weak

As the chart below shows, investors have been running away from H-P at an alarming rate. News of the accounting issue sent shares plunging 12 percent in a single day. Year-to-date, shares are down 55 percent and currently near decade lows. Over the past three years, the stock price has been cut by 75 percent. Meanwhile, other major tech companies such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Amazon.com (NASDAQ:AMZN) have all climbed higher.

Conclusion:

Hewlett-Packard is still one of the biggest tech companies in the world, but the company has major red flags. The company has been slow to adapt to a changing industry, and its earnings are in decline. H-P tried to capture growth without proper due diligence, which is now the topic of an accounting scandal. Some may view the company as a value play, but that could have been said several times over the past few months, and shares continue to punish shareholders. Considering the components of our CHEAT SHEET investing framework and the many uncertainties surround the accounting issues, we believe H-P is a STAY AWAY.

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