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Stock Strategist

Will HP's Stock Recapture the "Hurd Premium"?

For long-term investors, we think HP represents a solid buying opportunity.

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With  Hewlett-Packard (HPQ) shares trading at a substantial discount to our fair value estimate, and less than 6 times enterprise value to cash earnings, we believe the market's short-term anxiety over these shares has created an excellent buying opportunity for investors armed with a long-term perspective.

Hewlett-Packard is trading at a discount to large-cap peers such as  IBM (IBM),  Cisco Systems (CSCO), and  EMC Corporation (EMC), and at multiples similar to  Dell's (DELL), which is struggling to transition away from its PC-centric model. We believe the discount is unwarranted. HP's diverse model has much more in common with the high-quality tech names than it does with Dell, especially when you consider HP's diverse offerings in services, enterprise hardware, and printing, to drive value. In contrast, only 12% of HP's operating profit is derived from the commodity PC business. The firm lacks the unique assets such as  Oracle's (ORCL) database and IBM's mainframe businesses. However, the printing division is a dominant market player with a vast installed base, its services business is a steady contributor, and its hardware business rivals anyone in x86-based offerings. In other words, although HP may be trading at similar multiples to Dell, it has a much stronger business foundation. Below, we address some of the concerns that have sent investors fleeing the stock, and highlight reasons to be optimistic about the firm's prospects given the stock's current valuation.

Michael Holt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.