Comment on HPQ
While the bidding for 3PAR (PAR) is reminiscent of two drunks at a horse auction, whereby the winner is the loser, the 2 point decline in HPQ (HPQ) shares seems excessive. By taking $4.6 billion off its market value relative to the $1.6 billion (at last count) acquisition, investors appear to be ignoring the enterprise’s 8% free cash flow yield. The executives at HPQ have done an admirable job wringing costs out of the firm, from supply chain to benefits.
True, the Board of Directors is deemed subpar, given the excessive share buybacks when it should have considered value-adding opportunities, even so, the stock seems to have been punished too far.
While it remains to be seen the extent any further bids on HPQ’s part will have, given the potential deal is already a value-destroying consolidation, a glance at HPQ’s cash flow and credit metrics indicates the stock has little to fall from current levels. On the other hand, an add-on, to the already $4 billion + in remaining share buyback authorization would cause us to re-think the valuation.
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Disclosure: No positions
Kenneth S. Hackel, CFA
President
CT Capital LLC
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