HP Inc. (NYSE:HPQ) shares are up more than 6.66% this year and recently increased 1.63% or $0.36 to settle at $22.41. Hewlett Packard Enterprise Company (NYSE:HPE), on the other hand, is up 7.59% year to date as of 01/11/2018. It currently trades at $15.45 and has returned 2.59% during the past week.
HP Inc. (NYSE:HPQ) and Hewlett Packard Enterprise Company (NYSE:HPE) are the two most active stocks in the Diversified Computer Systems industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect HPQ to grow earnings at a 7.53% annual rate over the next 5 years. Comparatively, HPE is expected to grow at a -7.77% annual rate. All else equal, HPQ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 11.51% for Hewlett Packard Enterprise Company (HPE). HPQ’s ROI is 62.80% while HPE has a ROI of 2.10%. The interpretation is that HPQ’s business generates a higher return on investment than HPE’s.
Cash is king when it comes to investing. HPQ’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, HPE’s free cash flow per share was -0.01. On a percent-of-sales basis, HPQ’s free cash flow was 0.54% while HPE converted -0.06% of its revenues into cash flow. This means that, for a given level of sales, HPQ is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HPQ has a current ratio of 1.00 compared to 1.10 for HPE. This means that HPE can more easily cover its most immediate liabilities over the next twelve months.
HPQ trades at a forward P/E of 11.79, and a P/S of 0.72, compared to a forward P/E of 11.96, a P/B of 1.06, and a P/S of 0.85 for HPE. HPQ is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. HPQ is currently priced at a -5.88% to its one-year price target of 23.81. Comparatively, HPE is 3.48% relative to its price target of 14.93. This suggests that HPQ is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for HPQ and 2.70 for HPE, which implies that analysts are more bullish on the outlook for HPE.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. HPQ has a short ratio of 2.61 compared to a short interest of 2.83 for HPE. This implies that the market is currently less bearish on the outlook for HPQ.
HP Inc. (NYSE:HPQ) beats Hewlett Packard Enterprise Company (NYSE:HPE) on a total of 11 of the 14 factors compared between the two stocks. HPQ is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, HPQ is the cheaper of the two stocks on an earnings, book value and sales basis, HPQ is more undervalued relative to its price target. Finally, HPQ has better sentiment signals based on short interest.