June 5, 2011 in Business

Motley Fool: HP offers excuses, not answers

 

Hewlett-Packard’s (NYSE: HPQ) second-quarter results met low expectations, but the company lowered its full-year forecast again. That sent shares downward.

H-P explained its dour outlook by pointing to fallout from the disasters in Japan, slow sales of consumer PCs, and an underperforming enterprise services segment.

The Japanese excuse is interesting, as neither Cisco Systems nor IBM played the earthquake and tsunami card this quarter. Cisco mentioned a reshuffling of its components inventories to handle Japanese business disruptions. Big Blue gets 11 percent of its revenue from Japan, but saw no reason to complain. Did H-P suffer from the catastrophe in ways its peers just didn’t? Hmmm.

New CEO Leo Apotheker aims to beef up the company’s software offerings. He also aims to offer the WebOS operating system H-P got via its Palm acquisition on all H-P PCs, along with Windows.

Hewlett-Packard shares have recently been trading near a price-to-earnings (P/E) ratio of 9, compared to its five-year average of 15. That’s attractive, as are its strong returns on equity and invested capital. Many are doubting the company’s strategy and promise, though. So do a little digging and see what you think.

(The Motley Fool owns shares of IBM and its newsletter services have recommended Cisco Systems.)

My dumbest investment

I used to believe in buying and selling a lot, but The Motley Fool has converted me to the buy-and-hold approach. I learned my lesson with investments such as an oil sands company touted in a (non-Fool) newsletter. They said it was a great bargain near $4, and my 1,000 shares are sitting at less than $1 apiece now.

I used to enjoy the thrill of seeing something go up, but then many of my buys never did, or they lost most of their value. Now I prefer to invest in solid companies that aren’t likely to tank if I go on vacation for a few weeks or don’t check my holdings every day. – Kaye S., Austin, Texas

The Fool responds: When you’re thinking of buying a stock, stop and ask yourself whether you’re really investing or speculating. Are you buying because the company has a proven track record, competitive advantages, rosy growth prospects and an appealing price? Or is it a company that might strike gold or cure cancer or somehow make you rich overnight? Solid stocks can deliver great rewards to the patient.

Ask the Fool

Q: I’ve heard that Facebook is being valued at around $100 billion. Is that too high? – T.G., Boulder, Colo.

A: To a great degree, a company’s value is in the eyes of its beholders. You may sell your shares of Acme Explosives (ticker: KBOOM) when its market value hits $1 billion, thinking that’s too high – but someone will buy those shares, thinking the value is too low.

With Facebook, we can look at a few numbers to assess its suggested value. One estimate is that it will earn $2 billion (before taxes and interest) in 2011. If so, then its implied price-to-earnings (P/E) ratio will top 50, which is on the steep side ($100 billion divided by $2 billion is 50).

Apple’s forward-looking P/E ratio was recently around 12, and Google’s around 13.

For more context, consider the rough market values of Apple ($300 billion), General Electric ($200 billion), Google ($170 billion) and Amazon.com ($90 billion). Looking at those, does a $100 billion value for Facebook seem reasonable? Think about how reliable the company’s expected earnings and growth rates are, and how sure you are that it will still be around in five or 10 years. With new companies it can be smart to wait for a promising track record before investing.

Q: How many mutual funds are there? – M.R., Gainesville, Fla.

A: According to the Investment Company Institute, at the end of 2010, there were 8,545 mutual funds in existence. No wonder it can be hard to find outstanding funds! (There are some terrific ones out there, though – learn more at www.fool.com/mutualfunds /mutualfunds.htm.)

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