Should You Buy the Dow — Hewlett-Packard

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tdp2664 InvestorPlace Today, we’re looking at Dow Jones Industrial Average component Hewlett-Packard (NYSE: HPQ ). Many people probably think of it as a computer company, but the truth is HP really was a printer and imaging company until it bought out Compaq in 2002. Since then, it’s also gobbled up 3Com, Electronic Data Systems and Palm. The company now operates an Enterprise Business segment, a Software Division and an R&D division, in addition to printing, imaging and computing. In my eyes, the company basically keeps expanding by buying other businesses. Tech companies have their hands full on three fronts. The first is they are beholden to the economy. Tech can be expensive, so companies that fall on hard times will not be quick to upgrade or purchase equipment. The second front is competition. HP operates in a heavily competitive segment with some well-financed players. The third issue is that technology always is improving. If HP can’t keep up, it’s toast. These issues are apparent in the company’s long-term growth prospects. Right now, stock analysts looking out five years on HP see annualized earnings growth at 7.6%. At a stock price of $22, on FY 2011 earnings of $4.84, the stock presently trades at a P/E of 4.5. Dell ( NASDAQ : DELL ) trades at a P/E of 7.4 and IBM (NYSE: IBM ) at 14, so it is significantly undervalued by comparison. HP’s financials are fine. The company carries $13 billion in cash and $19 billion in debt. Trailing 12-month cash flow was $8.9 billion. The company also had 11 times the amount of free cash flow necessary to pay its 2.1% dividend. Obviously, even at this price, insiders aren’t biting. A director purchased 6,800 shares last November, but I guess he was overly optimistic — those shares were purchased at $43.69. Conclusion Hewlett-Packard is not a company I’m in love with, despite hiring Meg Whitman as its new CEO. If we put an 7.6 P/E on HP’s projected 2015 earnings of $6.23 per share, and factor in 2.1% compounded dividend yield reinvested, we get a price target of $47. That’s a solid double from these levels, so what’s my problem? HP feels like a dinosaur. Technology is moving fast, and HP’s way of keeping up has been to devour other companies. It’s not growing organically. And because it must keep spending money on other companies and its own R&D, its dividend isn’t likely to increase high enough to make it a retirement purchase. I think there are better places to put your money. I believe Hewlett Packard is a sell for regular accounts. I believe Hewlett Packard is a sell for retirement accounts. As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.