The Razor’s Edge

2-Year Price History

Ockham’s Rating

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HPQ Revenue

For a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. We utilize a historical weighted average methodology that treats recent years more importantly in the calculation. When looking at HPQ through this framework, we can see that our weighted average historical high and low Price to Sales per share ratios over the last 10 years are 0.71x and 0.42x respectively.

Utilizing this range we can see that HPQ’s current Price to Sales per share ratio of 0.62x is somewhat above its historical average. As such, the current Price to Sales ratio suggests a neutral share price forecast. In order for us to become more positive about HPQ we would need to see a drop in the Price to Sales ratio of 9% given current sales per share levels in order to return to its historical weighted average.

HPQ Cash Earnings

Looking at HPQ specifically in their Cash Earnings capabilities, Ockham views HPQ as significantly below its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 10 years of cash earnings levels for HPQ to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 10.84 and a 5.96 low over the same period.

Now that HPQ’s current price is $29.03 and its Price to Cash Earnings ratio is 5.17, we are very positive on its outlook from the cash earnings perspective. In fact, HPQ is now trading a full 39% below its average historical Price to Cash Earnings ratio at these profit per share levels. When our clients ask us why HPQ has great long term potential, the Cash Earnings levels to current stock is one of our primary reasons. But naturally, now we need for the overall market to recognize this disparity.

HPQ Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company’s inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from HPQ against the historic high and low levels over an available data range. Because HPQ has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In HPQ’s case, the estimated annual dividend is $0.32 producing a current dividend yield of 1.10%. The highest dividend yield from HPQ in recent history was 2.98% while the lowest dividend yield was 0.41%. While it is quite common for a growth stock to pay no dividend at all, but for a mature company such as HPQ that has a history of paying dividends it is disappointing to see their dividend yield drop so significantly. At this time, the current dividend yield is 35.10% below the median yield.