Are HP Shares a Value Trap or Turnaround Growth Play Among Tech Stocks?

Tech stocks like HP have to adapt quickly. Is this giant among PC makers ready for 2014?

When Hewlett-Packard (HPQ) disclosed an increase in its layoff plans, the news pleased investors. HP is continuing to look for ways to turnaround operations by generating organic growth.

And it looks like investors may keep pushing HP shares higher, but maybe that’s an indication that this is the right time for a reality check. Is HP a value trap, or a turnaround growth story?

Shares rebound

HP is up 36% from October 2013, closing recently at around $28.30:

Click on the interactive chart to see stock price over time. Sourced from Zacks Investment Research.

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Growth is organic

HP will be eliminating 34,000 workers in fiscal 2013. The 5,000 increase in layoffs will add another $400 million in write-downs. The aggregate charges will be around $4.1 billion. If the cuts come from management and engineering levels, then HP could save $100,000 per employee, on average. This would reduce costs by a sizeable $500 million annually.

Bullish investors could point to the solid performance in HP stock in past years as evidence that growth could be expected in the future. Some of the recent rise in the stock could be attributed to quantitative easing by the US Federal Reserve. For comparison, the S&P 500 (SPX) and the NASDAQ 100 (COMP) are up sharply since 2012:

Click on the interactive chart to see stock price over time. Sourced from Zacks Investment Research.

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Growth potentials

HP will probably rely on enterprise services, software, and hardware sales for growth in 2014 and beyond. Sales for PCs are getting better for HP, but mobile phones and tablet device sales will outpace PC demand overall in the foreseeable future.

HP has an attractive forward P/E of just 7.49 compared to industry peers. But EPS expectations for the next five years look weak, at -2.40% compared to 5% for Intel (INTC), 10.61% for International Business Machines (IBM) and 12% for Accenture (ACN). At current levels, investors may expect growth to be several quarters away.

Click on the interactive chart to compare X over time. Sourced from Zacks Investment Research.

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Written by Chris Lau. 

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