Financial Affairs of Hewlett Packard - Statistics Project Example

Financial Research Report Introduction This is a financial research report analyzing the financial affairs of Hewlett Packard co. The company has been reviewed for its financial performances and financial status on the basis of ratio analysis with particular stress on valuation of stocks, financial strength, profitability, and enterprise value of the company. Stock prices of the company have been analyzed in comparison with S & P 500 price index. Performance of a subsidiary of HP outside northern America has been reviewed. The growing Australian HP is considered for this purpose. Finally it has been observed on the basis researched analysis that US leg of HP is still contributing positively despite the economic slowdown. Company Overview Hewlett Packard Co. (HP) was formed in 1939 and it is today one of the largest IT companies with its revenue touching $118.4 billion during the financial year 2008.HP is in the industry of Diversified Computer Systems, and is one of 2008 Fortune 500 companies and is placed at no. 14 in the list. HP is a leading provider of e- technologies and products, software, solutions, and services for meeting the business and educational needs of the world. The company caters individuals, small and medium enterprises, as well as large enterprises in different fields of business and social strata. The basic objective of HP is to focus on three technological shifts. The first is to provide for next- generation data center. The second is to attain ‘always on always connected mobile computing, and third to provide for ubiquitous printing and imaging. HP intends to grow into an economic, social, and technological asset to each nation and community where HP carries on its business. HP is committed to three priority areas of raising social and environmental standards in the supply chain; improving energy efficiency in its operations, and to promote product reuse and recycling. HP’s business is divided into three business groups, namely, the Personal System Group, the Imaging and Printing Group, and the Technology Solution Group. The Personal System Group is in the manufacturing of business and consumer PCs, mobile computing devices, and workstations. The Imaging and Printing Group is in business of inkjet, laser jet, and commercial printing, printing supplies, digital photography, and entertainment. The Technology Solution Group deals in business products like storage and servers, EDS, managed services and software. The aims of the company are to make professional marketing services affordable for small businesses, to remain innovative and competitive, and to support and enhance access to key markets. HP has attained unparallel financial successes over the years. Its revenue has increased from $79905m in 2004 to $118364m. Its total assets have attained a figure of mighty $113331m in 2008 as against $76138m in 2004. The company’s basic net earning per share has improved from $2.23 in 2006 to $3.35 in 2008. As per Chairman, CEO and President Mr. Mark V Hurd’s statement in 2008 Annual Report1 the company has significant competitive advantages. It has a strong balance sheet, diversified revenue structure wherein more than half is of recurring nature, a lean and variable cost structure, and proven financial discipline. These statistics and achievements make HP a truly unparallel organization in the IT arena. Ratio Analysis Important required ratios have been calculated as under for carrying out the necessary ratio analysis: Income statements and Balance sheets for 2009, 2010, and 2011 have been estimated on the basis of available trends in 2008 as compared to 2007. These estimated financial statements are basis for calculations of relevant ratios for future three years. Note: It is assumed that dividends will not be declared and paid. Estimated ratio trend for future three years is as under: Profitability wise HP is performing well over the years. Operating margins have gone up from 3.91% in 2005 to 9.15% in 2008. The trend is rising over the years. Net profit margins (after interest and taxes) have shown a steady increase from 2.99% in 2005, 6.76% in 2006, to 6.97% in 2007, and 7.04% in 2008. Comparing with the industry average of 2.99%, it is observed that HP’s performance is one of best performances in the industry. The company has shown an encouraging performance on achieving the return on equity of 21.39% in 2008 against the industry average of 7.65%. The important thing is that this achievement is not a sudden improvement in the performance of the company. HP has achieved 21.39% in 2008 on basis of a steadily increasing performance over the years. Its ROE has been 6.45%, 16.25%, 18.85%, and 21.39% in 2005, 2006, 2007, and 2008 respectively; and this steady performance is highly commendable. Liquidity status of a company can be assessed through its current ratio. Current ratio tests the short term solvency of a firm. The current ratio of 2: 1 is considered optimum for any industry. Looking from this standard the performance of HP is less than satisfactory over the years. Its current ratio is 1.38, 1.35, 1.21, and 0.98 during 2005, 2006, 2007, and 2008 respectively. In fact the current ratio is steadily declining over the years. It appears that the company is facing liquidity crunch. It might be finding difficult to meet its short term liabilities as those become due. Financial strength of a company can be viewed easily from its capital structure. That is to say an analysis is to be made for the types of sources used by HP for financing its assets. It is observed that HP has used more of debt capital as compared to equity capital for financing its assets as reflected by its book debt to equity ratio. Book debt to equity ratio further suggests that HP has all along been a low geared company. Debt capital has always been employed less than equity capital over the years. In 2005, 2006, 2007, and 2008 debts have been 0.14, 0.136, 0.212, and 0.458 of equities. Interest coverage ratio, also known as time interest earned ratio, ‘measures the firm’s ability to make contractual interest payments. The higher the value of this ratio, the better able the firm is to fulfill its interest obligations.’2 The HP’s ability to meet its interest liability was 16.07 times in 2005 which rose to 31.83 times in 2008. It appears that HP has always been financially strong to meet its interest liability Enterprise value (EV) is the value that external market places on a firm. Simply EV is the value of assets employed in a firm reduced by free cash available with the firm. In other words this is sum total of debt capital and equity capital reduced by free cash available with the firm. ‘For a public company this value is the total market value of its interest bearing debt and its stock. For a private company, this is the amount a purchaser would be willing to pay for the company, including the assumption of its liabilities.’3 EV calculated from the figures available in the financial statements was $71598.16m, $96135.68m, $132362.40m, and $102392.24m for the years 2005, 2006, 2007, and 2008 respectively. Investors are very much concerned with P/E ratio as ‘it is a basic and very useful measure of how well a corporation is performing. The higher the P/E ratio, the riskier the stock is likely to be.’4 This is particularly true in case of shares of companies like HP dealing in information technology. In 2005 P/E ratio was as high as 34.2, and that came down to 17.77 in 2006, 19.28 in 2007, and 11.78 in 2008. That means in 2008 investors were willing to pay $11.28 for the company’s earning of one dollar as against $34.2 in 2005. The company’s share has lost its value relevance over the years. Market to book value ratio ‘gives an indication of how the business is viewed by the investors. Generally speaking, companies with high rate of return on equities (ROEs) sell at higher multiple of book values than those with low returns.’5. In 2005, 2006, 2007, and 2008 this ratio was 2.14, 2.77, 3.46, and 2.37 respectively. EV/EBITDA is a multiple that relate enterprise value to its earning before interest, taxes, depreciation, and amortizations. This is one of the most widely used multiples. In 2005 enterprise value of HP was 9.8 multiple of its EBITDA, which has come down to 7.22 multiple of EBITDA in 2008. This shows that HP has lost its enterprise value over the years in multiple of its EBITDA. But despite these reducing trends, the historical market price of the company has shown a fluctuating trend over the years. The price was $28.84 by the end of 2005. Then it rose to $38.74 per share in 2006, $51.68 per share in 2007, and then slipped to $38.28 per share by the end of 2008. Though the value of the share of HP is loosing charm over the years but its fluctuating historical market price is certainly keeping the investors’ interest alive. Stock Price Analysis There are two types of stock price analysis. One is fundamental analysis that assesses whether a company’s stock is undervalued, overvalued, or fairly valued. Fundamental analysis suggests that overvalued stock should be sold, undervalued stock should be purchased and fairly valued stock be purchased or sold as per preferences and goals of the investor. Technical analysis ignores financial statements. It focuses on prices, past prices, sales volumes to analyze the stock prices. Mostly it uses mathematical formulas or graphics for the analysis. In this analysis HP’s share prices fluctuations have been compared with S&P 500 price index on the closing of each of previous five fiscal years. As financial statements have been considered in ratio analysis, technical analysis is used to make stock prices analysis of HP. The comparative share price data of HP, S & P 500 index along with capitalization and price fluctuation analysis are provided in the following chart. It is seen that HP’s prices increased steadily in the first four years since 2004. In fact the price rise percentage was increasing every year. In the fifth year, i.e.2008, the price of HP share went down. In 2005 the increase was 50.27% of 2004, in 2006 it was 38.16% of 2005, and in 2007 the increase was 33.25% of 2006. In all these years it was good for investors to make investments in HP shares. The increasing price trend of HP shares was better than the increasing price trend of S & P 500 index. In fact in 2005 the HP share price increase was 50.27%, whereas S&P 500 index increased only with 6.8%. The same increasing trend continued for next two years, and after that it started decreasing. On the other hand S& P 500 index rose by 14.16% in 2005 and by 12.44% in 2007. But the share prices of HP fell by 25.84% in 2008, and that was again lesser as compared to 37.47% fall in S & P 500 index. That means HP shares behaved in more stable manner than even S& P 500 index. The capitalization value calculated on basis of actual share prices suggests that the value of HP was $92446m, $133180m, $105838m, and $79549m in 2008, 2007, 2006, and 2005 respectively. But this capitalized value is much lower than enterprise value (EV) for the same four years calculated earlier above. EV valuation is based on figures of financial statements. The EV was $177567m,$127567m, $109418m, and $103447m in 2008, 2007, 2006, and 2005 respectively. EV calculated on realistic figures from financial statements has presented a better value than the capitalized value on basis of market shares of the firm. Foreign Operations Hewlett Packard Australia Ltd is one noticeable division that is contributing positively to the growth of HP. As per Zed Net Australia ‘The Australian division of Hewlett- Packard grew its headcount by 22.9 per cent in the year to 31 October 2008, even as the company was finalizing plans to cut substantial number of workers from its newly combined operations with EDS.’6 Ben Woodhead 7 has reported in Computerworld that the Australian subsidiary of HP has shown an increase in revenue by 8.2% to A$3.22 billion. Further its net income has increased from A $53.3million in 2007 to A$80.6 million. All this information gives an idea that the Australian subsidiary of HP is certainly growing faster than expected, and it is almost closing in on to IBM in Australia. In fact Australian HP jointly with New Zealand subsidiary has launched a new subsidiary, IT outsourcing giant EDS. This speaks volume of growth of Australian subsidiary of HP. . Global Analysis Despite overall slowdown, the total market for HP in US is growing. Its annual report for 2008 reflects that net revenue from US market has increased from $34814m in 2007 to $36932m in 2008. The important thing is that revenue from US is more than 30% of total revenue of HP. In 2008 the total revenue from US was 36932m as against total revenue of HP during 2008 of $118364m. The 2008 annual report of HP also reveals that both as on 31 October 2008 and as on 31 October 2007 the United States division possessed more than 10% of HP’s total consolidated net assets. More over there was no other division except the United States that had 10% or more of HP’s consolidated net assets. The report further states that US has also more than 10% of HP’s consolidated property, plant, and equipment in any period. This reveals that US has not lagged behind in its contribution to total overall revenue and assets of HP despite the economic slowdown. In fact the revenue contribution of US is rising. Accordingly it is wrong to assume that HP’s overseas revenue is serving to provide any kind of shelter for the slow or negative growth in US market. In fact US division of HP is contributing positively in all aspects of growth of Hewlett Packard Co. References Read More