TABLE OF CONTENTS

EXECUTIVE SUMMARY……………………………………………………………

7

INTRODUCTION……………………………………………………..……….………

7

The Hewlett-Packard Company……………………………………………….

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Hewlett-Packard Company Background……………………………………...

8

Hewlett-Packard Products and Services………………………………………

11

Hewlett-Packard Management and Leadership………………………………

13

Hewlett-Packard Mission, Goals, and Objectives...…………………….…..…

14

Hewlett-Packard Vision…...……………………………………………….……

15

Hewlett-Packard Cultural Business Values………..……………………..……

16

Hewlett-Packard Cultural Business Ethics………………………………..……

17

Hewlett-Packard Industry Competition………………………………….…….

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Hewlett-Packard Competitive Strategies………………………………….……

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Hewlett-Packard Growth and Market Position; Sales and Assets……………

20

Hewlett-Packard Social Responsibility………………………………….………

20

MARKET OUTLOOK………………………………………………..……….………

21

Introduction to the Stock Market……..………………………………….………

21

Historical Performance………………..………………………………….……… 25 Future Outlook………………………...………………………………….……… 28

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INDUSTRY OUTLOOK………………………………………………..……….……… 30 Nature of the Industry……………………….………………………………..…… 30 Type of Composition……………………..………………………………….……. 31 Average Industry Growth………………………………………………….……

31

Opportunities and Threats in the Industry………………………….……………

33

Future Outlook…….………………….………………………………….………

34

FINANCIAL STATEMENT ANALYSIS……………………………..……….……… 35 General Discussion of HP Financial Statements………………………….……… 35 Financial Ratios……....………………..………………………………….……… 42 Common Size Statements……………..………………………………….……… 42 Cash Flow Analysis……………..………………………………..……….……… 46 STRENGTHS AND WEAKNESSES ANALYSIS………..…………..……….……… 47 Financial Ratio to Industry Analysis……....……………………..……….……… 47 Financial Strengths and Weaknesses (SWOT) Analysis………………….……… 58 VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS...……… 62 Strategy for Increasing the Company’s Value…………....…..…..……….……… 62 REFERENCES.......................................................................................................……… 64

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LIST OF FIGURES

FIGURE 1:

Anatomy of a Trade ………………..……………………………

24

FIGURE 2:

Dow Jones Historical Trends ……………………………………

25

FIGURE 3:

Dow Jones Industrial Average 1900-Present Monthly..…………

26

FIGURE 4:

S&P 500 Index 1960-Present Weekly..………………….………

27

FIGURE 5:

Dow Jones Industrial Average 1960-Present Monthly..…………

27

FIGURE 6:

NASDAQ Composite 1978- Present Weekly………….………… 28

FIGURE 7:

Products and Services Segmentation..…………………………… 31

FIGURE 8:

Real Growth..………………………………..…………………… 32

FIGURE 9:

Revenue and Revenue Growth Rate..…………….……………… 32

FIGURE 10:

Income Statement, Hewlett-Packard..…………….……………… 36

FIGURE 11:

Statement of Operation, Hewlett-Packard……….………………

FIGURE 12:

Balance Sheet, Hewlett-Packard..…………….………..………… 37

FIGURE 13:

Asset Structure, Hewlett-Packard..…….………….……………… 38

FIGURE 14:

Liabilities & Equity Structure, Hewlett-Packard...………………

38

FIGURE 15:

Cash Flow Statement, Hewlett-Packard..……….………………

39

FIGURE 16:

Cash Flow Activity, Hewlett-Packard..…………….……………

40

FIGURE 17:

Cash Flow Analysis, Hewlett-Packard..………….……………… 40

FIGURE 18:

Common Size Income Statement, Hewlett-Packard..……………

FIGURE 19:

Common Size Balance Sheet, Hewlett-Packard..…...…………… 45

FIGURE 20:

Current Ratios..………………………...………….……………… 49

FIGURE 21:

Quick Ratios..…………………………..………….……………… 49

36

43

Hewlett Packard FIGURE 22:

Inventory Turnover Ratios………….…………….……………… 50

FIGURE 23:

Days Sales Outstanding Ratios……..…………….……………… 51

FIGURE 24:

Fixed Asset Turnover Ratios..………….………….……………… 51

FIGURE 25:

Total Asset Turnover Ratios………...…………….……………… 52

FIGURE 26:

Debt Ratios..…………………………………….….……………… 53

FIGURE 27:

Profit Margin Ratios..…………………..………….……………… 54

FIGURE 28:

Basic Earnings Ratios..………………….…………...…………… 54

FIGURE 29:

Return on Total Ratios..…………….……………………..……… 55

FIGURE 30:

Return on Common Equity Ratios..…...….……….……………… 55

FIGURE 31:

Price/Earnings Ratios..…………………….……….……………… 56

FIGURE 32:

Price/ Cashflow Ratios..…………………………...……………… 57

FIGURE 33:

Market/Book Ratios……………………………….……………… 57

FIGURE 34:

SWOT Analysis……………………...…………….……………… 58

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Hewlett Packard LIST OF ATTACHMENTS

ATTACHMENT 1:

Raw Financial Data

ATTACHMENT 2:

Processed Finance Data

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EXECUTIVE SUMMARY This paper provides a comprehensive financial analysis of Hewlett-Packard, a leading U.S. computer & peripheral manufacturing corporation. The paper begins with some general information pertaining to Hewlett-Packard, including company background, products and services, current management, mission and objectives, cultural business values and ethics, competitive strategies, and their overall market position. The paper will then discuss the state of the market, including historic performance and future outlook. Following this, the paper provides an industry outlook, covering the industry’s nature and composition, growth, opportunities and threats, and future outlook. Once this foundation is laid, the paper will provide a comprehensive ratio to industry analysis of Hewlett-Packard; to include an analysis of their financial strengths and weaknesses, and their overall level-of-performance within the industry. Finally, the paper concludes with a value-based financial analysis of Hewlett-Packard, and provides some recommendations for improved market performance. Upon completion of this paper, the reader should have a very broad understanding of the overall market and the computer & peripheral manufacturing industry, as well as an in-depth knowledge of Hewlett-Packard’s financial standings and their current position within the market. With that, let’s begin… INTRODUCTION The Hewlett-Packard Company Hewlett-Packard, commonly referred to as HP, is one of the largest Information Technology (IT) companies in the world. Headquartered in Palo Alto, California, HP is a global corporation that operates in over 170 countries across the world (en.wikipedia.org). HP specializes in 1) developing and manufacturing computer, storage, and networking hardware, 2) designing and developing software applications, and 3) providing IT related support and

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services. HP markets its products to individual users, as well as small, medium, and large businesses (Annual Report, 2009). Their value chain distribution channels consist primarily of consumer-electronics and office-supply retailers, and their software partners (en.wikipedia.org). But they also sell directly to consumers through internet based e-stores. HP is highly diversified across several IT market segments, providing a wide portfolio that encompasses everything from digital cameras to digital entertainment, and from home computers and peripherals to powerful supercomputer networks. On the services side, they cover the spectrum from product support for individual customers to enterprise solutions and support for small and medium size businesses. No other corporation offers as complete an IT product portfolio as HP (www.hp.com). This broad diversification provides HP a distinctive competitive advantage when it comes to providing the right product and service solutions to a vast array of consumer requirements. Hewlett-Packard Company Background William Hewlett and David Packard started the Hewlett-Packard Company in a small Palo Alto, California, garage in 1939. They stood the company up with an initial capital investment of $538. HP was incorporated on 18 August 1947, but the HP trademark was not filed until November 1954. The company went public on 6 November 1957 (en.wikipedia.org). In the beginning, HP was not very focused. As they searched for their market position, they worked on a wide variety of industrial electronic products (en.wikipedia.org). After a couple successes, they decided to focus on design and production of high-quality electronic test and measurement equipment. Within 10-years, they built a solid reputation for innovative, reasonably priced test equipment. Their most distinguishing feature was providing

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instrumentation sensitivity, accuracy, and precision not met by comparable rivals (en.wikipedia.org). In the late 1950s, HP spun off a small company named Dynac to specialize in digital electronics equipment. The company was later renamed Dymec, which in 1959 was folded back into HP. At this time, HP began building digital electronics equipment using minicomputers manufactured by other companies. By 1966, HP entered the computer market and began building their own microcomputers (en.wikipedia.org). Initially, HP was not considered a credible computer company like IBM, who was well known for their large main-frame computers. But that would soon change as they began to apply their novel innovation and design skills towards developing small but powerful desktop computer systems. In 1968, they become the first manufactures of mass-produced personal computers (PCs). HP initially marketed these PCs as desk-top calculators because they believed they would be ridiculed by the industry if they called them computers (en.wikipedia.org). Regardless, these PCs were an engineering marvel at the time because their logic circuits were entirely assembled with discrete components. A PC system, which included a CRT display, magnetic-card storage, and printer was priced for around $5000 (en.wikipedia.org), which was a significant amount of money at that time. Over time, HP developed global respect for being the first-to-market producer of many advances in electronic calculators. They introduced the first handheld scientific calculator in 1972 and the first handheld programmable calculator in 1974. From the beginning, HP’s design philosophy was to “design for the guy at the next bench” (en.wikipedia.org), and their products quickly gained a strong reputation for quality and user friendliness.

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In 1984, HP introduced inkjet and laser printers for use with their desktop PCs. These printers were a great technological advancement beyond the dot matrix printers of the time. To enable them to stay on the leading edge of the rapidly evolving printer industry, HP partnered with Cannon (who was already partnered with Xerox) to develop a highly successful line of allin-one printer/scanner/copier/fax machines. The print mechanisms for these printers were based almost entirely on Canon components, which in turn used technology developed by Xerox. HP developed proprietary hardware, firmware, and software that converted data into dots for the mechanism to print (en.wikipedia.org). This provided HP a technology advantage that could not be easily copied by rivals. In addition to their many partnerships, HP also grew through acquisition strategies; buying Apollo Computer in 1989 and Convex Computer 1995. By the mid 1990s, HP began to expand their computer product line to reach common consumers. Up until this point, their sales strategy was primarily targeted towards university, research, and business users (en.wikipedia.org). Although HP did quite well selling PCs and peripherals through their value chain distributors, they desired a closer relationship with their end customers. To accomplish this, they opened hpshopping.com in the late 1990s as an independent subsidiary that sold directly to customers online. This initiative was very successful; providing direct customer feedback that HP used to further customize their product lines. This enabled HP to be very receptive to their customers’ needs and resulted in strong consumer loyalty. In 2005, the HP on-line store was renamed the “HP Home & Home Office Store.” To sustain its edge in rapidly advancing digital technology, in 1999 HP made a drastic change in their business strategy to focus strictly on their core competencies related to computer, storage, and imaging devices. At that time, all their businesses not directly related to this core

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competency were spun off to form a new corporation called Agilent (en.wikipedia.org). HP was now entirely dedicated towards computer, storage, and imaging products, software, and services. Between 1999 and 2005, HP experienced extremely turbulent times. During this period, the market halved HP’s value commensurate with the industry average, and the company incurred heavy job losses (en.wikipedia.org). It was during this time that HP acquired Compaq. Compact was also an IT industry leader (having itself bought Tandem Computers in 1997 and Digital Equipment Corporation in 1998), but it was struggling from recent declines in sales and revenues. This acquisition strategy resulted in HP becoming a top-3 player in the desktop, laptop, and server industry (en.wikipedia.org). Soon following this merger with Compaq, HP’s new symbol became HPQ; incorporating the “Q" logo Compact had used on all of its products. In 2006, HP reinvented its business strategy with a new campaign slogan, “The Computer is Personal Again” (en.wikipedia.org). This campaign was focused on the preface that the PC is a personal product. The campaign utilized the newest information age marketing methods, including viral marketing, sophisticated visuals, and its own web site. With the financial crisis facing the US and global economies beginning in 2007, HP was increasingly pressured to again diversify beyond their existing market areas. As a result, in 2009 HP acquired 3 Com for $2.7 billion in cash (en.wikipedia.org). This move initiated HP’s immersion into the enterprise networking market currently dominated by Cisco. Only time will tell how well this diversification will pay off for HP. Hewlett-Packard Products and Services As discussed earlier, HP’s product lines are focused on personal computing devices, enterprise servers, storage devices, printers, and other imaging products. Specific products

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produced by HP include workstation computers, home & small business computers, servers, printers, scanners, digital cameras, calculators, PDAs, and associated software applications (www.hp.com). In addition to producing hardware and software, HP also provides a vast array of services for designing, implementing, and supporting IT infrastructures. Today, HP’s distinctive competencies that give them a competitive edge within the industry are related to the production of innovative imaging & printing systems and solutions. They are the world’s leading provider of inkjet and laser jet printers, printer consumables (ink and toner cartridges), all-in-one multifunction printer/scanner/faxes, large format printers, printer management software, output management software suites, optical recording technology, digital cameras and photo printers, photo sharing and photo products services, and iPhone software applications (www.hp.com). In addition, based on unit volume shipped and annual revenue, HP is today’s world leading producer of personal computers (www.hp.com). Such products include business PCs and accessories, consumer PCs and accessories, handheld computing devices, digital "connected" entertainment, media smart servers, and DVD+RW drives. Under HP’s enterprise business, they also provide world-renowned technical services, information management software, business intelligence solutions, communications and media software, and enterprise/ networking storage services. To leverage their venture into enterprise business services and to augment their software offerings for business customers, HP followed a deliberate strategy that included the purchase of 12 independent software companies (www.hp.com).

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Finally, HP has a large investment in IT research and development, which delivers new technologies and creates business opportunities that go beyond their current product strategies. This effort includes a web-based forum on early-state innovations to encourage open feedback from consumers and the development community. Hewlett-Packard Management and Leadership Like most publicly owned corporations, Hewlett-Packard is managed by a Chief Executive Officer (CEO) and several lower executive-level officers. Following are the executive leaders and managers of HP (Annual Report, 2009): Mark V. Hurd is the Chief Executive Officer and President. He has served as Chairman since September 2006 and as Chief Executive Officer, President, and a member of the Board since April 2005. Peter J. Bocian has served as Executive Vice President and Chief Administrative Officer since December 2008 R. Todd Bradley has served as Executive Vice President of Personal Systems since June 2005. Michael J. Holston has served as Executive Vice President and General Counsel since February 2007 and as Secretary since March 2007. Vyomesh I. Joshi has served as Executive Vice President of Imaging and Printing Group since 2002. Catherine A. Lesjak has served as Executive Vice President and Chief Financial Officer since January 2007. Ann M. Livermore has served as Executive Vice President of Enterprise Business since May 2004. John N. McMullen has served as Senior Vice President and Treasurer since March 2007. Randall D. Mott has served as Executive Vice President and Chief Information Officer since July 2005. James T. Murrin has served as Senior Vice President, Controller and Principal Accounting Officer since March 2007.

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Marcela Perez de Alonso has served as Executive Vice President, Human Resources since January 2004. Shane V. Robison has served as Executive Vice President and Chief Strategy and Technology Officer since May 2002. Hewlett-Packard Mission, Goals, and Objectives Hewlett-Packard's Mission Statement is very broad and comprehensive. Following is an excerpt from their mission statement: We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sector (Annual Report, 2009). HP's mission and corporate objectives remain the same as they were when first written by co-founders Bill Hewlett and Dave Packard in 1957 (Annual Report, 2009). As such, they have successfully guided the company for over 50 years. Whether or not their corporate objectives are well written can be debated, but one thing remains certain; they have successfully held up to the test of time. Following are seven corporate objectives from HP’s mission statement (Annual Report, 2009): Customer loyalty. To provide products, services and solutions of the highest quality and deliver more value to our customers that earns their respect and loyalty. Profit. To achieve sufficient profit to finance our company growth, create value for our shareholders and provide the resources we need to achieve our other corporate objectives.

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Market leadership. To grow by continually providing useful and significant products, services and solutions to markets we already serve - and to expand into new areas that build on our technologies, competencies and customer interests. Growth. To view change in the market as an opportunity to grow; to use our profits and our ability to develop and produce innovative products, services and solutions that satisfy emerging customer needs. Employee commitment. To help HP employees share in the company's success that they make possible; to provide people with employment opportunities based on performance; to create with them a safe, exciting and inclusive work environment that values their diversity and recognizes individual contributions; and to help them gain a sense of satisfaction and accomplishment from their work. Leadership capability. To develop leaders at every level who are accountable for achieving business results and exemplifying our values. Global citizenship. Good citizenship is good business. We live up to our responsibility to society by being an economic, intellectual and social asset to each country and community in which we do business. Hewlett-Packard Vision HP’s vision statement is somewhat vague as far as their future market position. It seems to be more of a broad-stroke statement of their commitment towards, and the potential corporate benefits of, a diversified workforce. It focuses on diversity, leadership, and their global quest. Following is HP’s vision statement:

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We believe diversity is a key driver of our success. Putting all our differences to work across the world is a continuous journey fueled by personal leadership from everyone in our company. Our aspiration is that the behaviors and actions that support diversity and inclusion will come from the conviction of every HP employee - making diversity and inclusion a conscious part of how we run our business throughout the world (www.hp.com). Hewlett-Packard Cultural Business Values Bill Hewlett and Dave Packard established a management style and corporate culture they referred to as the "The HP Way." According to Hewlett, the HP Way "...includes a deep respect for the individual, a dedication to affordable quality and reliability, a commitment to community responsibility, and a view that the company exists to make technical contributions for the advancement and welfare of humanity." (as cited by en.wikipedia.org, n.d.) HP’s value statements (The HP Way) are very short and to the point, making them easily understood and communicated. Six of HP’s value statements include (en.wikipedia.org): Our shared values. The way we get things done Passion for customers. We put our customers first in everything we do. Achievement and contribution. We strive for excellence in all we do; each person's contribution is key to our success. Results through teamwork. We effectively collaborate, always looking for more efficient ways to serve our customers. Speed and agility. We are resourceful, adaptable and achieve results faster than our competitors. Meaningful innovation. We are the technology company that invents the useful and the significant.

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Hewlett-Packard Cultural Business Ethics HP has earned a long respected reputation for conducting business in a fair and honest manner. They have established high ethical standards of conduct, and they’ve done an outstanding job of living up to those standards in their business activities. Dave Packard’s following statement says it best: “At HP we want to be a company that is known for its leadership in corporate ethics and responsibility. A company where employees are proud to work, and customers, partners and suppliers want to do business with.” (www.hp.com, n.d.) The ethics values Bill Hewlett and Dave Packard brought to the company over 70 years ago are still engrained into HP’s corporate culture. Following are HP’s ethics statement and two of the traits they have strived to sustain (www.hp.com): Our ethical standards and shared values form the cornerstone of our culture of uncompromising integrity. Our culture of integrity and accountability, and our performance culture go hand-inhand. We win, both as individuals and as a company, by doing the right thing. Trust and respect for individuals - We work together to create a culture of inclusion built on trust, respect and dignity for all. Uncompromising integrity - We are open, honest and direct in our dealings. Hewlett-Packard Industry Competition The IT industry is intensely competitive, while also subject to rapid ongoing technological advancements and price reductions. As such, HP experiences stiff industry

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competition in all their business activities. HP has met this competition head on, and is a powerful contender because of their ability to successfully compete on several fronts; including technology, performance, price, quality, reliability, brand reputation, distribution, range of products and services, ease of use, and product support (Annual Report, 2009). Every IT market segment consists of multiple major corporations with long-established market positions, as well as rapidly growing newcomer firms. Because most IT products and technology have very short life cycles, to successfully compete, HP must constantly innovate, develop, and introduce new and enhanced products. Another continuing trend in the IT industry is declining consumer prices, even as technological capabilities are enhanced. This means that, to remain competitive, HP must continuously find ways to reduce the value chain costs of their suppliers and distributors. But HP has distinctive competitive advantages when it comes to global reach, research and development capabilities, and intellectual property. Hewlett-Packard Competitive Strategies HP has a wide ranging and well established competitive strategy that focuses on competitive positioning within the industry, operational efficiency, growth investments, and leveraging the scale and scope of their product lines. These strategies have proven quite successful. Following are HP’s four strategy objectives (Annual Report, 2009): Competitive Positioning – We are positioning our businesses to take advantage of important trends in the markets for our products and services. We are aligning our printing business to capitalize on key market trends such as the shift from analog to digital printing and the growth in printable content by developing innovative products for consumers such as the first web-connected home printer. We are also positioning our enterprise business to capitalize on the trend towards converged infrastructure products that integrate storage, networking, servers

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and management software. In addition, we have developed IT management software offerings that seek to satisfy the increasing demand for virtualization management and increased automation. Driving Operational Efficiency – We have implemented an ongoing program to optimize efficiency and reduce cost across the company. As part of those efforts, we are continuing to execute on our multi-year program to consolidate real estate locations worldwide to fewer core sites in order to reduce our IT spending. Investing for Growth – We are investing some of the savings derived from our efficiency initiatives for growth. For example, we are increasing our sales coverage to expand the size of the market that we cover, including expanding into emerging markets such as China, India and Brazil. We are creating innovative new products and developing new channels to connect with our customers, particularly in our PC business. In addition, we are expanding our portfolio of products and services that we can offer to our customers, both through acquisitions and through organic growth. Leveraging our Portfolio and Scale – We now offer one of the IT industry’s broadest portfolios of products and services, and we are working to leverage that portfolio as a strategic advantage. For example, in our enterprise business, we are able to provide servers, storage and networking packaged with services that can be delivered to customers in the manner of their choosing, be it in-house, outsourced or as a service via the Internet. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding

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our use of industry standard components in our enterprise products to further leverage our scale. Hewlett-Packard Growth and Market Position; Sales and Assets Sales. HP has long retained its leading global position in the inkjet, laser, and multifunction printers market. In 2006, HP posted higher revenues than IBM, their number one rival, making them the overall top dog in the IT industry. They have sustained this lead as the world’s largest IT seller since that time. In 2007, HP’s revenue increased to $104 billion, making them the first-ever IT company to report revenues in excess of $100 billion (en.wikipedia.org). In 2009, HP’s revenues exceeded IBM’s by over $21 billion. At this time, their number one rival is Acer, and their market share gap is 6.3%. Their long-time rival, Dell, fell back to third place. In addition to their sustained successes in the PC and printer markets, HP has also advanced to become the world’s 6th largest software company (en.wikipedia.org). Assets. HP is obviously a rapidly growing corporation. Much of this growth has been obtained through successful acquisitions and mergers. For example, its merger with Compaq in 2002 and its acquisition of EDS in 2008 led to combined revenues of 118.4 B in 2008. HP received the Fortune 500 ranking of #9 in 2009 (en.wikipedia.org). Also in 2009, HP announced the acquisition of 3 Com. This initiative will diversify HP into the lucrative enterprise networking market. Hewlett-Packard Social Responsibility HP has always displayed a strong commitment to social responsibility. Unlike many corporations who say the right things, but fail to follow through with actions, HP has a very good track record of making a difference for the communities in which they operate and live.

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HP announced in 2007 that they met their 4-year target to recycle 1 billion pounds of electronics, toner, and ink cartridges. Since then, they set a new goal of recycling an additional 2 billion pounds of hardware by the end of 2010 (en.wikipedia.org). These efforts to protect the environmental from the waste of their products go well beyond that of most their industry competitors. During 2009, Newsweek ranked HP #1 in their Green Rankings of America's 500 largest corporations. This recognition resulted primarily from HP’s greenhouse gas emission reduction programs (en.wikipedia.org). HP was an industry first to report greenhouse gas emissions associated with their supply chain. In 2010, HP was awarded the #1 position of Corporate Responsibility Magazines’ 100 Best Corporate Citizens. HP’s commitment to social responsibility is even included as a focus area in their mission statement: Global citizenship - Good citizenship is good business. We live up to our responsibility to society by being an economic, intellectual and social asset to each country and community in which we do business (Annual Report, 2009). MARKET OUTLOOK Introduction to the Stock Market The stock market can be described as an organized buying and selling (or trading) of company stocks. Some of the most common stock markets include the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the NASDAQ.

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The stock markets are regulated by the United States Securities and Exchange Commission (SEC). Their mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation (www.sec.gov). The U.S. investment markets began in 1790 when the federal government issued $80 million in bonds to repay the Revolutionary War debt. Two years later, twenty-four brokers and merchants signed the “Buttonwood Agreement,” agreeing to trade securities on a commission basis and laying the basis for securities trading in New York City (www.nyse.com). In 1817, New York brokers formed the New York Stock & Exchange Board (NYS&EB). The name was shorted to New York Stock Exchange (NYSE) in 1863. In 2006, the NYSE merged with Archipelago to form the NYSE Group, Inc., trading publicly on March 8. In 2007, the NYSE Group merged with Euronext, and was renamed NYSE Euronext. Euronext is a combination of the Paris Bourse, Brussels Exchange, Amsterdam Exchange, Lisbon Exchange, London International Financial Futures, and Options Exchange. NYSE Euronext became the first ever global financial marketplace group. The American Stock Exchange (AMEX) grew from what began as the New York Curb Market (and later, in 1929, the New York Curb Exchange). The name curb was because traders would often conduct business in the streets. They were known as “curbstone brokers.” These independent traders often invested in smaller up and coming companies that provided new investment opportunities. In 1929, the New York Curb Market changed their name to the American Stock Exchange. The AMEX joined the NYSE Euronext in 2008. The NASDAQ market (once an acronym for National Association of Securities Dealers Automated Quotations) is made up of technology, retail, communications, financial services, transportation, media, and biotechnology companies. It is the largest U.S. electronic stock

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market. Unlike the NYSE and the AMEX, the NASDAQ does not have a trading floor. Instead, NASDAQ’s presence is shown using the NASDAQ Market Site in New York’s Times Square. The tower has a large outdoor electronic display, which provides current financial information 24 hours a day. The NASDAQ historically has maintained greater stability in times of market stress (www.nasdaq.com). The level of successes (and failures) of the stock markets are measured by various stock market indices. Along with the NASDAQ Composite, two of the most referred to and used are the Dow Jones Industrial Average (DJIA) and the Standard & Poors (S&P) 500. The Dow Jones is comprised of a price-weighted average of 30 pre-defined stocks. These stocks are from large, publicly traded U.S. companies. Although widely recognized as an indicator of market performance, the Dow has often been criticized as not an accurate representation of the overall performance because it uses a very small number of stocks. The S&P 500, on the other hand, is a market-value weighted average of 500 stocks from large US companies which are traded on the NYSE or the NASDAQ. Because the S&P factors many more companies, it is often referred to as the preferred index, providing a truer indication of the stock markets.

Hewlett Packard Figure 1: Anatomy of a Trade

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Market periods are frequently referred to bull or bear. The bull-bear line is a reference to the 250-day moving average line, which provides a reference point for mid and long term investors. If the index is below the line and there is a decrease in movement, the market is considered a bear market. If the index is above the line and the movement is generally upward, it is considered to be a bull market. However, again, the level of the market and the period the market is in is purely one’s own perception. Historical Performance As detailed in the below figure, history shows that the market typically moves in cycles. In the past 113 years, there have been four bull markets (shown in green) and four bear markets (shown in red). Investment strategies that work in bull markets may not be effective in flat or bear markets (www.fulfillment.cfgweb.com). Figure 2: Dow Jones Historical Trends

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The following charts show the progress of the Dow Jones Industrial Average, S&P 500 Index, and the NASDAQ Composite over the years. As you can see, the trend has been a continuous upward slope with the exception of a few periods, such as the recent recession we faced in the early 2000’s (the September 11, 2001 terrorist attacks and aftermath, the recent bank failures, and the drop in housing prices) (stockcharts.com). If you overlay the Dow Jones Industrial Average and the S&P 500 Index historical data, you will see that the charts almost lay on top of one another thereby showing the relative similarities in the markets (online.wsj.com).

Figure 3: Dow Jones Industrial Average 1900-Present Monthly

Hewlett Packard Figure 4: S&P 500 Index 1960-Present Weekly

Figure 5: Dow Jones Industrial Average 1960-Present Monthly

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Figure 6: NASDAQ Composite 1978- Present Weekly

Future Outlook The future outlook of the market is always a cloudy crystal ball. If one could easily predict the future of the market, there would be little risk in investing. It is always easier to look in the past and jump on the bandwagon pretending to have been able to foresee the future as many economical analysts have done. There is still a great deal of people who buy securities in the market based on current and past performance. In the New York Times Article, “Buy American. I Am.”, dated 16 October 2008, Warren E. Buffett (CEO of Berkshire Hathaway) stated, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful” (www.nytimes.com, n.d.). Investors should not be too wary of the down turns of the market in the past as much as they should realize that they are simply getting a bargain on securities at this time (they are on sale!).

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Buffett also wrote, in the same article, that “Cash is trash”. "Today people who hold cash equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible longterm asset, one that pays virtually nothing and is certain to depreciate in value." This is where the Time Value of Money principles apply. Money is never worth the same tomorrow as it is today. Money cannot gain anything simply sitting in an envelope on a shelf or in a safe. Buffett goes on to say that equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Some investors think it’s wise to hold on to their cash until they can effectively time their move back into the market at a later date. This strategy, Buffett points out, ignores Wayne Gretzky’s advice, who once said, “I skate to where the puck is going to be, not to where it has been.” Consumers were able to use their homes to get extra spending cash; using them as a sort of ATM machine by getting home equity loans or second mortgages. However, with the collapse of the housing market, and home prices falling, many of these individuals have not only lost equity, but now have one or two additional home loans. Because the market is affected by multiple factors, both at home and abroad, it is often unclear how and when any minor or major event may trigger a large ripple effect. Often, even a simple rumor may change the direction of the markets.

That said, the future of the market should not matter too much for the long term investor. Based on historical trends, every dip in the market is followed by a growth. One just needs to be wary of the growth, for it too will soon fall again.

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Although the market has been slowly gaining ground, the Federal Reserve does not anticipate raising interest rates any time soon. They anticipate leaving the rates as they are for “an extended period” (online.wsj.com). Hopefully, the Fed’s actions to leave rates at these historically low levers will encourage spending. One final trend that should be noted is that NASDAQ has maintained greater stability in times of market stress. When markets are unstable, specialist firms reduce their risk by widening spreads, participating less, or halting the stock altogether. NASDAQ's spreads remain tight and, as a result, volume shifts to NASDAQ and other electronic markets (www.nasdaq.com). INDUSTRY OUTLOOK Nature of the Industry The North American Industry Classification System (NAICS) classifies HP in the ‘Computer & Peripheral Manufacturing in the US’ industry, with a code of 33411. This is comparable to the Standard Industrial Classifications (SIC) ‘Computer Peripheral Equipment (3577) and the Standard & Poor’s ‘Computer Hardware’ sub-industry. The companies in this industry manufacture and assemble personal computers, workstations, laptops, computer servers, and computer storage devices, with some variations among the companies. Per the IBIS World Industry Report, technology innovations characterize this industry. Selling prices, economic activity (disposable household income), product advancements, specific national/global events (e.g. Y2K), and substitute products drive the industry demand. Additionally, many companies in this industry manufacture their products outside the U.S.; either directly or by others (2010). Thus, changes in the applicable nations’ wage structures and economy can have a significant impact to companies in this industry.

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Type of Composition Forty-three percent of the industry’s 2010 revenues are expected to come from the top several companies; with HP, IBM, and Dell being the top-three industry leaders. “Industry concentration has (resulted from) increased industry mergers (e.g. Seagate acquiring Maxtor) and market share gains by major players. However, products and markets (within the industry) have broadened” (IBIS 2010). This broadening is with such products as netbooks. Figure 7: Products and Services Segmentation (IBIS) Product/Services

Share

Electronic computers

63.1%

Other computer peripherals

24.1%

Computer storage devices

12.5%

Computer terminals

0.3%

Though HP, IBM, and Dell are the top-three industry peers, their market comparisons couldn’t be more diverse. HP is in the middle of the stock value range, with a price of $53.42 (at the time of this report, Dell was priced at $17.00 and IBM was priced at $129.26). In addition, IBM appears to be the low-risk and high revenue leader of this peer group, with a 0.81 beta and 14% of the industry’s revenue. Dell is a riskier company with a 1.3 beta and an industry revenue percentage of 2.7%. HP holds a comfortable middle position behind IBM, but well ahead of Dell, with an industry revenue percentage of 6.7% - half of IBM’s, but double Dell’s Average Industry Growth

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In 2009, per the S&P Sub-Industry Summary, the Industry Index rose 74.2%, strongly surpassing the 24.3% gain in the S&P 1500 index. Year to date through 4/28/10, the Industry Index rose 6.7% verses 7.7% increase in S&P 1500 (Smith 2010). However, in terms of real growth for industry revenue, industry gross product, etc., the industry has been in a five year decline across the board. See Figure 8. Figure 8: Real Growth (IBIS) Industry Revenue Industry Gross Product Number of Establishments Number of Enterprises Employment Exports Imports Total Wages Domestic Demand

2006 *0.3 *-0.5 *-3.5 *-3.5 *-8.3 *1.3 *4.0 *-12.6 *2.8

2007 *-8.1 *-9.7 *-5.0 *-5.0 *-7.0 *-6.9 *0.7 *-7.0 *-1.5

Figure 9: Revenue and Revenue Growth Rate (IBIS)

2008 *-6.6 *-7.9 *-5.0 *-5.0 *-7.0 *-2.9 *-3.3 *-7.0 *-5.5

2009 *-9.2 *-12.0 *-5.0 *-5.0 *-9.0 *-8.0 *-9.5 *-9.0 *-10.0

2010 *-1.7 *-2.3 *-3.0 *-3.0 *-3.0 *1.0 *0.0 *-1.8 *-1.5

% % % % % % % % %

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Opportunities and Threats in the Industry Threats Competitive Market. Across the industry, strong price competition and rising component costs are putting heavy pressure on the profit margins. This is driven by the fact that there are several long established major industry players, including Dell, IBM, Sun Microsystems, HP, Apple, and others (Global Markets 2009). These low profit margins make investments in technological advances a fine, but necessary balance for the industry leaders. Declining Global PC Shipments. As margins in the computer manufacturing industry shrink, research from Gartner, a research firm, forecasts that global PC shipments will decline by about 11.9% to 257 million units; the sharpest decline in history. Gartner also states that the sales in emerging markets will decline. This global reduction in PC sales could further increase pricing pressures and result in further industry operating margin losses (Global Markets 2009). Global Economic Slowdown. The ongoing economic crisis has had major effects on all geographic regions, prominently across Europe and the US. Real U.S. GDP decreased by 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4 percent in 2008 (Gross Domestic Product 2009). Such weak economic conditions across the industry’s key markets could further pressurize the companies’ revenues and thereby adversely affect the overall business (Global Markets 2009). Opportunities Demand for IT Outsourcing. “There is increased spending on IT outsourcing across the world” and “This trend is expected to continue” (Global Markets 2009). The industry has been

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taking advantage of this opportunity by offsetting low margins from hardware production with high margins from services. As an example, in August 2008, HP paid $13B for a technology services provider, Electronic Data Systems. In doing so, HP is positioning the company to take advantage of the higher profit margins obtained for services. This makes good sense, since HP is the worldwide leader in PC sales, but as mentioned in threats, this provides low-profit margins. HP’s Personal Systems Group only accounted for 12% of earnings with 31% of revenue (high costs), versus services providing 38% of earnings with only 30% of revenues (Stock Report 2010). This picture is the same across the industry; IBM has gone so far as to sell their PC segment to Levono. Wireless and Portable Computing. The Computer Hardware Sub-Industry has potential opportunities in wireless and portable computing, as it appears there is a growing consumer preference for this, per the S&P Stock Report (2010). In addition, the demand for small, lowcost “ultra-portable” notebook PCs and internet-based applications are experiencing strong growth. As such, these are some of the continuing technological advancement opportunities that industry players should take advantage of. Future Outlook The demand for computers and peripherals is expected to grow; however, prices are expected to fall at a faster rate. As previously stated, competitive downward pressure on average unit selling prices will negatively impact revenue (IBIS 2010). Overall, “the industry is expected to contract further in the five years through 2015, at a real average rate of 0.3% annually”. These low hardware margins are going to further fuel price competition, making infrastructure and other value chain costs saving of utmost importance. But all is not lost, as the S&P is projecting

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the cyclical downturn in PC sales to rebound with a projected growth of 17% in 2010 and 15% in 2011; which is much better than the 3% growth experienced in 2009. However, these increased sales will be offset by the continuing trend toward lower average selling prices. One final factor that should not be overlooked in relation to the computer hardware industry is the fact that demand in this market can be substantially impacted by unpredictable events, such as the 9/11 Terrorist attack or the “Y2K bug.” Of course, such events can have positive or negative effects on the industry depending on the nature of the event. Similarly, new advancements in technology are sometimes unexpected and can result in exponential growth – as in the case of IPods and e-Readers. FINANCIAL STATEMENT ANALYSIS General Discussion of HP Financial Statements The Financial statement provides information of value to investors, lenders, and corporate officials. Financial statements include an income statement, a balance sheet, and a cash flow statement for specific periods of time. This report focuses on annual data. Financial statements are typically prepared using Generally Accepted Accounting Principles (GAAP), which are common guidelines used to normalize accounting practices. The following figures provide an income statement, a balance sheet, and a cash flow statement for HP over the past five years (2009 – 2005). In addition, some graphic representations of the data located on these sheets are added to better clarify the given information. And an analysis of this information will follow.

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Figure 10: Income Statement, Hewlett-Packard, (In Millions of Dollars) Income Statement (Millions of Dollars)

2009

2008

2007

2006

2005

Revenue Net Sales (Revenue)

114552 114552

118364 118364

104286 104286

91658 91658

86696 86696

Cost of Revenue Other Expenses Depreciation/Amortization Total Operating Expense

87524 15321 1571 104416

89921 17003 967 107891

78887 15897 783 95567

69427 15067 604 85098

66440 16267 622 83329

Operating Income (EBIT)

10136

10473

8719

6560

3367

Interest Income (Expense) , Net NonOperating Net Income Before Taxes (EBT)

-721 9415

0 10473

458 9177

631 7191

176 3543

Income Taxes Income After Taxes

1755 7660

2144 8329

1913 7264

993 6198

1145 2398

Figure 11: Statement of Operation, Hewlett-Packard, (In Billions of Dollars)

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Figure 12: Balance Sheet, Hewlett-Packard, (In Millions of Dollars) Balance Sheet (Millions of Dollars)

2009

2008

2007

2006

2005

Cash and Short Term Investments Total Receivables, Net Total Inventory Other Current Assets Total Current Assets

13334 25301 6128 7776 52539

10246 25439 7879 8164 51728

11445 21582 8033 6342 47402

16422 18555 7750 5537 48264

13929 17364 6877 5164 43334

Property/Plant/Equipment, Total - Gross Accumulated Depreciation, Total Property/Plant/Equipment, Total - Net Goodwill, Net Note Receivable - Long Term Intangibles, Net Other Long Term Assets, Total Total Other Assets

20944 -9682 11262 33109 3303 6600 7986 62260

18885 -8047 10838 32335 2722 7962 7746 61603

16411 -8613 7798 21773 2778 4079 4869 41297

15024 -8161 6863 16853 2340 3352 4309 33717

13880 -7429 6451 16441 2246 3589 5256 33983

114799

113331

88699

81981

77317

Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities

14809 16528 707 1143 9816 43003

14138 18511 7502 2674 10114 52939

11787 14441 2511 675 9846 39260

12102 12435 624 2081 8608 35850

10223 11188 649 1182 8218 31460

Long Term Debt Deferred Income Tax Other Liabilities, Total Total Liabilities

13980 4230 13069 74282

7676 3162 10612 74389

4997 397 5519 50173

2490

3392

5497 43837

5289 40141

Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity

24 13804 29936 -3247 40517

24 14012 24971 -65 38942

26 16381 21560 559 38526

27 17966 20729 -578 38144

28 20490 16679 -21 37176

114799

113331

88699

81981

77317

Total Assets

Total Liabilities and Equity

Hewlett Packard Figure 13: Asset Structure, Hewlett-Packard, (In Billions of Dollars)

Figure 14: Liabilities & Equity Structure, Hewlett-Packard, (In Billions of Dollars)

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Figure 15: Cash Flow Statement, Hewlett-Packard, (In Millions of Dollars) Cash Flow (Millions of Dollars)

2009

2008

2007

2006

Net Income/Starting Line Depreciation Deferred Taxes Non-Cash Items Changes in Working Capital Cash from Operating Activities

7660 4773 379 1632 -1065 13379

8329 3356 1035 1086 785 14591

7264 2705 415 517 -1286 9615

6198 2353 693 759 1350 11353

2398 2344 -162 1898 1550 8028

Purchase of Fixed Assets Acquisition of Business Sale of Fixed Assets Sale/Maturity of Investment Purchase of Investments Cash from Investing Activities

-3695 -391 495 171 -160 -3580

-2990 -11248 425 280 -178 -13711

-3040 -6793 568 425 -283 -9123

-2536 -855 556 94 -46 -2787

-1995 -641 542 2066 -1729 -1757

Other Financing Cash Flow Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities

162 -766 -3303 -2766 -6673

293 -796 -7810 6293 -2020

481 -846 -7784 2550 -5599

251 -894 -5241 -193 -6077

0 -926 -2353 -1744 -5023

Net Cash – Beginning Balance Net Cash - Ending Balance

10153 13279

11293 10153

16400 11293

13911 16400

12663 13911

3126

-1140

-5107

2489

1248

Net Change in Cash

2005

Hewlett Packard Figure 16: Cash Flow Activity, Hewlett-Packard, (In Billions of Dollars)

Figure 17: Cash Flow Analysis, Hewlett-Packard, (In Billions of Dollars)

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The income statement, Figure 10, itemizes revenues and expenses for HP over the last five years. This statement is used by investors and lenders to determining the profit ability of the company. The income statement also shows earnings per share (EPS), normalizing the measurement of a firm’s performance and allowing investors to compare diverse companies such as HP to other similar industry competitors. Figure 11, Statement of Operation, gives a visual representation of Revenue, Expenditures, Earnings Before Interest and Taxes (EBIT), and Net Income over the past 5 years. The difference between revenue and expenditures is equal to the EBIT. The net income is what remains after taxes and interest have been accounted for. In 2009, HP took in 114.6 billion dollars in revenue and claimed only 7.7 billion dollars in net income, a 6.71% profit margin. The balance sheet, Figure 12, provides assets, liabilities, and owners' equity (net worth) for HP over the last five years. The balance sheet is used by investors and lenders to evaluate the company’s ability to adjust to changing markets and future opportunities. Figure 13, Asset Structure, gives a visual representation of current and fixed assets over the past five years. Figure 14, Liability & Equity Structure, gives a visual representation of current and long term liability, as well as equity, over the past five years. Total assets for 2009 are obtained by summing the current and fixed assets at a total sum of 114.8 billion dollars. Total liabilities and equity for 2009 are obtained by summing the total liabilities with the total equity at a total sum of 114.8 billion dollars. Both the total assets and total liabilities plus equity should equal the same amount. The cash flow statement, Figure 15, presents cash generated from operating, investing, or financing activities for HP over the last five years. The cash-flow statement is used by investors

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and lenders to determine whether cash will be available to meet debts and payments such as dividends. Figure 16, Cash Flow Activity, gives a visual representation of the year end (next year beginning) net cash and the net change in cash from year to year. HP had a total of 3.1 billion dollars cash at the end of 2009. Figure 17, Cash Flow Analysis, gives a visual representation of the cash from operating, investing, and financing activities for HP over the last five years. The summation of these three activities provides the net change in cash flow equal to that of the net change in cash flow from year to year. Given the complexities of the Income Statements, Balance Sheets, and Cash Flow Statements, the data provided, while balanced, shows limited detail with only critical values; many of which were used in the calculation of the required ratios. Financial Ratios For the purpose of clarity and understanding, the discussion of financial ratios, to include HP specific financial ratios, has been incorporated into the Strengths and Weaknesses Analysis section of this paper, under Financial Ratio to Industry Analysis. Common Size Statements Common size ratios will be used to compare HP’s income statements and balance sheets over a five-year period. By expressing the financial statement items in a common size measure, standardized values will be provided to better assess any observed trends over time. The income statement values will be expressed as a percentage of total revenue, whereas the balance sheet values will be expressed as a percentage of total assets.

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Common Size Income Statement Analysis. As shown in Figure 18, HP’s common size income statement values have remained very constant over the past 3-years, between 2007 and 2009. This is in stark contrast to the year 2005, and to some extent 2006. Between 2005 and 2007, HP’s Total Operating Expense was reduced by around 4.5%. This appears to have resulted primarily from Other Expenses, which has continuously dropped over the past 5-years. In concert with these reductions in operating expenses, HP also experienced significant increases in Operating Income, Net Income Before Taxes, and Income After Taxes, between 2005 and 2007 (4.5%, 4.7%, and 4.2% respectively). As such, although the income statement ratios have remained consistent during the past 3-years, there have been significant gains over the past 5-years. Figure 18: Common Size Income Statement, Hewlett-Packard, (In Millions of Dollars) Income Statement (Millions of Dollars)

2009

2008

2007

2006

2005

Revenue Net Sales (Revenue)

100 100

100 100

100 100

100 100

100 100

Cost of Revenue Other Expenses Depreciation/Amortization Total Operating Expense

76.4 13.4 1.4 91.2

76.0 14.4 0.8 91.2

75.6 15.2 0.8 91.6

75.7 16.4 0.7 92.8

76.6 18.8 0.7 96.1

Operating Income (EBIT)

8.8

8.8

8.4

7.2

3.9

-0.6 8.2

0.0 8.8

0.4 8.8

0.7 7.8

.2 4.1

1.5 6.7

1.8 7.0

1.8 7.0

1.1 6.8

1.3 2.8

Interest Income (Expense) , Net NonOperating Net Income Before Taxes (EBT) Income Taxes Income After Taxes

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Common Size Balance Sheet Analysis. As shown in Figure 19, HP’s common size balance sheet values indicate negative trends between 2005 and 2008, with positive changes occurring between 2008 and 2009. Some noteworthy trends are as follows: Total Current Assets increased 2.9% between 2005 and 2006, but then decreased 13.3% between 2006 and 2008. These reductions primarily stemmed from reductions in Cash and Short Term Investments; and to some extent, reductions in Total Inventory. Between 2008 and 2009, overall Total Current Asset ratios remained virtually unchanged. Total Other Assets dropped 2.9% between 2005 and 2006, but then increased, by 13.3%, between 2006 and 2008. These gains primarily resulted from increases in goodwill, intangibles, and accumulated depreciation, and were likely related to acquisitions and mergers during the period. Between 2008 and 2009, overall Total Other Asset ratios remained virtually unchanged. Total Current Liabilities experienced constant upward trends between 2005 and 2008 (6% total), then dropped by 9.2% between 2008 and 2009. These changes in current liabilities were primarily due to changes in Notes Payable/Short Term Debt; and to some extent, Accrued Expenses. Total Liabilities increased 13.7% between 2005 and 2008, then decreased slightly (0.9%) between 2008 and 2009. The increases observed between 2005 and 2008 appear to have resulted from increases in Long Term Debt and Deferred Income Tax, as well as Other Liabilities. Total Equity was inversely proportional to the changes in Total Liabilities between 2005 and 2009; with a 13.7% decrease between 2006 and 2008, and a 0.9% increase between 2008 and 2009. The vast majority of these changes were absorbed by Additional Paid-In Capital.

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Figure 19: Common Size Balance Sheet, Hewlett-Packard, (In Millions of Dollars) Balance Sheet (Millions of Dollars)

2009

2008

2007

2006

2005

Cash and Short Term Investments Total Receivables, Net Total Inventory Other Current Assets Total Current Assets

11.6 22.0 5.3 6.8 45.8

9.0 22.4 7.0 7.2 45.6

12.9 24.3 9.1 7.2 53.4

20.0 22.6 9.5 6.8 58.9

18.0 22.5 8.9 6.7 56.0

Property/Plant/Equipment, Total - Gross Accumulated Depreciation, Total Property/Plant/Equipment, Total - Net Goodwill, Net Note Receivable - Long Term Intangibles, Net Other Long Term Assets, Total Total Other Assets

18.2 -8.4 9.8 28.8 2.9 5.8 7.0 54.2

16.7 -7.1 9.6 28.5 2.4 7.0 6.8 54.4

18.5 -9.7 8.8 24.5 3.1 4.6 5.5 46.6

18.3 -10.0 8.4 20.6 2.9 4.1 5.3 41.1

18.0 -9.6 8.3 21.3 2.9 4.6 6.8 44.0

Total Assets

100

100

100

100

100

Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities

12.9 14.4 0.6 1.0 8.6 37.5

12.5 16.3 6.6 2.4 8.9 46.7

13.3 16.3 2.8 0.8 11.1 44.3

14.8 15.2 0.8 2.5 10.5 43.7

13.2 14.5 0.8 1.5 10.6 40.7

Long Term Debt Deferred Income Tax Other Liabilities, Total Total Liabilities

12.2 3.7 11.4 64.7

6.8 2.8 9.4 65.6

5.6 0.4 6.2 56.6

3.0

4.4

6.7 53.5

6.8 51.9

Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity

0.0 12.1 26.1 -2.8 35.3

0.0 12.4 22.0 -0.0 34.4

0.0 18.5 24.3 0.6 43.3

0.0 21.9 25.3 -0.7 46.5

0.0 26.5 21.6 -0.0 48.1

Total Liabilities and Equity

100

100

100

100

100

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Overall, the common size balance sheet indicates negative trends between 2005 and 2008, with positive changes occurring between 2008 and 2009. Cash Flow Analysis Some analysts consider cash flow as perhaps a company’s most important financial barometer. Figure 15 shows the Cash Flow Statement for HP over the last five years, 2009 2005. The Net Income increased steadily from 2005 through 2008, followed by a 0.67 billion dollar decrease from 2008 to 2009. Cash from operating activities has gone from an 8 billion, five year low, in 2005 to 13.4 billion in 2009, with 2008 seeing a high of 14.6 billion. The greatest increase in cash from operating activities was seen from 2007 to 2008. In 2007, smaller deferred taxes and non-cash items, along with a reduction in working capital, resulted in much lower cash from operating activities than 2006. This produced a 1.7 billion dollar reduction. Cash from operating activities more than compensated the following year, with a 5 billion dollar increase. Investing activities increased steadily from $1.8 billion in 2005 to $13.7 billion in 2008. Acquisition of other businesses was the main contributor to these increased investment cash flows. A 3-year low in investment activity was seen in 2009, with $3.6 billion being invested. This increased overall cash flows by 10.1 billion dollars. Cash from financing activities was both positive and negative over the past five years. Retirement of stock was the biggest influence. 2008 saw the biggest issuance of debt at 6.3 billion dollars.

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Over the past five years, HP has seen positive and negative cash flow. As seen in figure 16, the largest adjustment occurred from 2006 to 2007 with a reduction of 7.6 billion dollars. A 1.2 billion dollar increase was seen from 2005 to 2006 and a 4.0 billion dollar increase was seen from 2007 to 2008, yet the overall annual cash flow was negative for that year. The largest increase in cash flow was seen from 2008 to 2009 with an increase of 4.3 billion dollars. Figure 17 shows the net cash flow analysis in billions of dollars. It can be seen that the combination of outgoing investment and finance dollars were similar to the operating incoming dollars, the net cash flow being the delta between the adjacent columns. In 2007, the largest discrepancy between inflow and outflow of dollars was realized. Investments took a large increase from 2.8 to 9.1 billion dollars with a 1.8 billion dollar decrease in operating income. This was a contributing factor to the overall net cash flow reduction of 5.1 billion dollars seen that year. HP plans to continue investing heavily in business growth opportunities, while increasing operating income and managing debt. STRENGTHS AND WEAKNESSES ANALYSIS Financial Ratio to Industry Analysis There are many resources available to provide financial ratios for both specific companies and specific industries. These sources use differing ratios, as there are many to choose from, and occasional calculation variations for computing these ratios. In addition, the ratio calculations used are not well defined by the source, so comparison of ratios from different sources becomes difficult. Similar issues arise when comparing data on specific industries from differing sources. Because HP is such a large and diversified company, it can be included in

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many industries and sub-industries within the computer & peripheral manufacturing industry. This further compounds the issues associated with collecting data from multiple sources in an effort to get a complete data set, and can lead to suspect or incomparable ratios. In an effort to avoid such discrepancies, this report uses raw data from a single source (www.galenet.galegroup.com, Eden-Webster Library) for a select number of corporations that make up a significant majority of the computer & peripheral manufacturing industry. HewlettPackard (HPQ), International Business Machines Corp. (IBM), Dell Inc. (DELL), Apple Inc. (AAPL), and Sun Microsystems (SUNW) provide the data sets for the industry and corporate analysis. The raw data used in these analyses include five years of Income Statements, Balance Sheets, and Cash Flow Statements (from 2009 to 2005), and are included as Attachment A. The ratios presented are from a list of ratios outlined in the text, Financial Management Theory and Practice, 12th Edition. After much research of multiple sources, Dunn & Bradstreet (D&B) Key Financial ratios for the computer & peripheral manufacturing industry were selected as a comparison to validate the computed ratios generated from raw data. The majority of the computed ratios were well within the range of the D&B provided ratios. Financial Strength. A company’s financial strength is an assessment of their business risk. Part of this risk analysis assesses a company’s ability to cover or pay off short term debt. This can be done by using assets that can be quickly converted to cash. These assets are considered liquid or current assets. The following ratios are used to asses a companies liquidity and financial strength.

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Current Ratio – [Current Assets / Current Liabilities] A current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. A higher ratio is considered better because it means there are more liquid assets that could be converted to cover outstanding debt. Figure 20: Current Ratios Year HP Industry

2009 1.22 1.56

2008 0.98 1.47

2007 1.21 1.51

2006 1.35 1.43

2005 1.38 1.65

Quick Ratio – [(Current Assets – Inventories) / Current Liabilities] A quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. A higher ratio is considered better because it shows a company is not dependant on inventory to cover short term debt. Figure 21: Quick Ratios Year HP Industry

2009 1.08 1.48

2008 0.83 1.38

2007 1.00 1.42

2006 1.13 1.34

2005 1.16 1.56

Upon analysis of the financial strength ratios of HP and the industry, both the current and quick ratios for HP’s have been lower than the industry average which may question its ability to pay short-term obligations. HP continues to maintain a high level of outstanding receivables that cause a reduction in their quick ratio. In addition, in 2008, HP acquired Electronic Data Systems (EDS), another information technology services provider, in a deal worth about $13 billion. This

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acquisition was paid for with cash and new debt, which provides a substantial, but manageable, leveraging of the company's financial position. The only year that HP was not able to maintain a liquidity ratio grater than 1:1 was 2008. The 2009 ratio increased almost 25% from 2008 and was more in line with the company’s 5-year average of 1.23. Even in 2008, when the current ratio was below 1, HP was able to meet all short term debt obligations. Asset Management. A company’s asset management ratios measure success in managing assets to generate sales. These ratios can provide insight into a company’s inventory and credit management. The following ratios are used to asses various aspects of asset management. Inventory Turnover – [Sales / Inventory] A higher Inventory Turnover Ratio is indicative of better performance since this indicates the firm's inventories are being sold more quickly. However, if the ratio is too high then the firm may be losing sales to competitors due to inventory shortages, reflecting a company’s ability to convert inventory into cash. Figure 22: Inventory Turnover Ratios Year HP Industry

2009 18.7 44.4

2008 15.0 41.6

2007 13.0 39.5

2006 11.8 45.4

2005 12.6 50.4

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Days Sales Outstanding (DSO) – [Receivables / (Annual Sales/365)] The DSO ratio provides an indication of how long it takes to collect accounts receivables, comparing outstanding receivables to average daily sales. A lower ratio shows less time spent waiting on outstanding receivables and quicker cash flow turnaround. This has great bearing on a company’s credit policies. Figure 23: Days Sales Outstanding Ratios Year HP Industry

2009 80.6 73.1

2008 78.4 71.1

2007 75.5 75.8

2006 73.9 71.8

2005 73.1 65.6

Fixed Asset Turnover – [Sales / Net Fixed Assets] The fixed asset turnover ratio compares fixed assets to sales generated. A higher fixedasset turnover ratio shows that the company is more effective in using their fixed assets to generate revenues. Figure 24: Fixed Asset Turnover Ratios Year HP Industry

2009 10.2 12.6

2008 10.9 13.4

2007 13.4 13.0

2006 13.4 13.2

2005 13.4 14.1

Total Asset Turnover – [Sales / Total Assets] The asset turnover ratio measures a company’s efficiency at using their assets to generate sales or revenue. A higher number is desirable. This may also assist in indicating a pricing

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strategy. Companies with low profit margins tend to have high asset turnover, whereas companies with high profit margins have low asset turnover. Figure 25: Total Asset Turnover Ratios Year HP Industry

2009 1.00 1.07

2008 1.04 1.22

2007 1.18 1.21

2006 1.12 1.25

2005 1.12 1.28

Upon analysis of the asset management ratios of HP and the industry, all HP ratios have been below the industry average, with the exception of fixed asset turnover ratio in 2006 and 2007. The 5-year data shows that HP typically takes between two and three months to collect outstanding receivables. The HP business model continues to be asset intensive. The net assets portfolio in 2009 increased 20.8% from those in 2008. This increase resulted from higher levels of financing originations and is reflected in the asset management ratios. Debt Management. A company’s debt management is based on how it uses lender’s money as an opportunity to operate and grow as a corporation. In order to stay solvent or make greater profits, it’s sometimes more practical to invest borrowed funds rather than tie up other critical resources. Debt ratio is the proportion of a firm's total assets that are being financed with borrowed funds. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk. Debt Ratio – [Total Liabilities / Total Assets] Debt ratio indicates what proportion of debt a company has relative to its assets. The measure indicated potential risks the company faces in terms of its debt. A debt ratio greater

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than 1 indicates that a company has more debt than assets. A debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with the current and quick ratios, the debt ratio can help determine a company's level of risk. Figure 26: Debt Ratios Year HP Industry

2009 0.65 0.66

2008 0.66 0.69

2007 0.57 0.63

2006 0.53 0.62

2005 0.52 0.58

HP has been near, but slightly lower than the industry average for the last five years. As seen in 2008 and 2009, HP’s long term debt increased significantly with the purchase of Electronic Data Systems in 2008 and 3Com Corp in 2009. Total liabilities increased from 50 to 74 billion dollars from 2007 to 2009. Along with these purchases, the assets also increased from 89 to 114 billion dollars from 2007 to 2009. This increase in assets offset the increase in debt, keeping the debt ratio slightly below the industry average. HP continues to smartly manage debt and maintain a productive balance between debt and assets. Profitability. A company’s profitability is a measure used to assess their ability to generate earnings, as compared to their expenses and relevant costs. Having a higher ratio value relative to the industry average, or the same ratio from a previous period, indicates that the company is stable and less risky. Profit Margin on Sale (Net) – [Net Income / Sales] A higher profit margin on sale indicates a more profitable company that has better control over its costs compared to its competitors. But in some cases, lower profit margins represent a

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pricing strategy. Some businesses, especially retailers, may be known for their low-cost, highvolume approach. On occasion, a low net profit margin may represent a price war which is lowering profits, as was seen in the computer industry during 2000. Figure 27: Profit Margin Ratios Year HP Industry

2009 6.7% 4.6%

2008 7.0% 8.2%

2007 7.0% 8.1%

2006 6.8% 5.1%

2005 2.8% 5.3%

Basic Earning Power – [Earnings Before Interest and Taxes (EBIT) / Total Assets] The basic earning power ratio indicates how effective assets are used to generate earnings. A higher ratio with respect to the industry average indicates the company is controlling their operating costs and assets, while increasing profits. Figure 28: Basic Earnings Ratios Year HP Industry

2009 8.8% 7.2%

2008 9.2% 10.9%

2007 9.8% 10.6%

2006 8.0% 8.1%

2005 4.4% 8.8%

Return on Total Assets (ROA) – [Net Income / Total Assets] The return on total assets ratio demonstrates how effectively the company is converting its assets into net income. The higher the ratio, the more profitable the company is, because the company is earning more money on less investment.

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Figure 29: Return on Total Assets Ratios Year HP Industry

2009 6.7% 4.1%

2008 7.3% 8.6%

2007 8.2% 8.9%

2006 7.6% 6.5%

2005 3.1% 7.4%

Return on Common Equity (ROE) – [Net Income / Common Equity] The return on common equity ratio is useful for comparing the profitability of a company’s past performance, as well as to that of other firms within the industry. It also measures a corporation's profitability by showing how much profit a company generates with the money shareholders have invested. A higher ratio shows increased profit using existing equity. Figure 30: Return on Common Equity Ratios Year HP Industry

2009 18.9% 12.4%

2008 21.4% 40.2%

2007 18.9% 32.6%

2006 16.2% 22.8%

2005 6.5% 26.6%

Upon analysis of the profitability ratios of HP and the industry, HP was lagging behind the industry until 2009 when it outperformed the industry by all indicators. In addition, HP’s profit jumped 14 percent in the first quarter of 2010; indicating that their cost-cutting efforts, started in 2009, and their push into rival IBM Corp.'s stronghold of technology services is helping the company absorb the declining sales in most of their major divisions. Deep cost cuts have accompanied a recent shift in HP's strategy. HP eliminated 19,000 of the 24,600 jobs expected as part of the EDS acquisition. These cuts have helped increase earnings by reducing operating costs.

As a yardstick for the health of overall technology spending, HP's latest

numbers reinforce the trends of stronger consumer demand for items such as the new NetBooks.

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Market Value (Valuation or Risk). A company’s market value ratios relate an observable market value, the stock price, to book values obtained from the firm's financial statements. These ratios allow a company to evaluate the perceived performance of investors. These ratios also provide investors a good risk analysis of the company’s current and future standings in the industry. Price/Earnings (P/E) – [Price per Share / Earnings per Share] A high price to earnings ratio suggests that investors are expecting higher earnings growth in the future. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios may be considered "risky" investments as compared to those with a lower P/E ratio. A high P/E ratio signifies high expectations, thus higher risk. Figure 31: Price/Earnings Ratios Year HP Industry

2009 12.1 13.5

2008 14.2 16.2

2007 16.5 20.0

2006 15.0 20.6

2005 27.8 24.9

Price/Cash Flow – [Price per Share / Cash Flow per Share] The price to cash flow ratio compares the stock's market price to the amount of cash flow generated on a per-share basis. Some analysts consider cash flow as perhaps a company’s most important financial barometer, and the ratio of stock price to operating cash flow is favored by many analysts over the price-earnings ratio as a measure of a company’s value.

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Figure 32: Price/Cashflow Ratios Year HP Industry

2009 7.5 9.7

2008 10.1 12.9

2007 12.0 16.1

2006 10.9 16.7

2005 14.1 18.3

Market/Book (M/B) – [Market Price per Share / Book Value per Share] The market to book value per share expresses the total net assets of a business on a per share basis. This allows companies and investors to compare book values of a business to the stock price and gauge differences in valuations. If the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued. Figure 33: Market/Book Ratios Year HP Industry

2009 2.3 4.2

2008 3.0 7.1

2007 3.1 8.0

2006 2.4 6.7

2005 1.8 9.2

Upon analysis of the market vale ratios of HP and the industry, it can be seen that ratios for HP have decreased from 2008 to 2009. The decreases seen in 2009 are less than seen in the industry, thus making HP’s outlook better than many of the industry competitors. Much of this drop is attributed to the decline in PC sales. With a consumer move towards smaller, lower cost net books, HP has focused on cost reductions, increased technology services, and wireless products in an effort to stay competitive within the industry.

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Financial Strengths and Weaknesses (SWOT) Analysis

HP is an industry leader in developing and manufacturing computer, storage, and networking hardware; designing and developing software applications; and providing IT related support and services. The company’s recent acquisitions and expansion plans could present opportunities to increase revenue. But this does not come without significant risk. Competition in the market, declining PC sales, and recently acquired debt increases could negatively impact the company’s operational and financial performance. Figure 34: SWOT Analysis Strengths

Weaknesses

Operational Performance Market position Strong Presence Resources

Litigations Limited Liquidity

Opportunities

Threats

Acquisitions/Expansions IT Outsourcing

Competitive Market Declining PC Market

Strengths Operational Performance During 2009, HP recorded total revenues of 114.5 billion dollars, a slight decrease from 2008, but an overall increase of 32% since 2005. The operating profit of the company was 10,136 billion dollars, an increase of 300% since 2005. The net profit of the company was 7660 billion dollars, an increase of 319% over 2005. HP’s strong performance resulted from increased revenue across all business divisions. Further, the company's profit margin was 6.7% during

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2009 was above the industry average of 4.6%. This higher than average profit margin could indicate efficient cost management or it could be the result of strong pricing strategies. HP experienced their largest profit margin increase (4.0%) from 2005 to 2006. This may have been due to several cost cutting measures taken starting in 2004. This indicates management's focus on improving profitability. The company’s growth was fuelled by the growth of information technology in start up markets around the world. Additionally, the acquisition of other information technology businesses expanded HP’s operational performance and growth.

Market Position HP occupies a strong position within the computer & peripheral manufacturing industry. It is a world leader in the sales of personal computers. It occupies a 19.3% share of the global PC market. It is also a global leader in imaging and printing systems, and leads the market in UNIX based servers. HP has the third largest share of the storage market in the Americas and the second largest share in Europe and the Middle East (www.techtarget.com). HP’s strong market position enhances its reputation and attracts new investors. Strong Presence HP is a global company with a presence in more than 170 countries across the world (en.wikipedia.org). The company’s products are sold throughout the world through a combination of retailers; internet partners, distributors and direct sales. Global diversity reduces the risks associated with adverse economic and political developments in any specific region. In addition, it increases the company’s growth opportunities. HP’s broad product portfolio also enables it to have an expansive presence across many of the industries market segments.

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Resources HP’s return on equity (ROE) was 18.9% during 2009. This was above the industry average of 12.4%. A higher ROE ratio indicates that the company is efficiently using the shareholders' money and that it is generating high returns for its shareholders compared to other companies in the sector. Weaknesses Litigations HP has been involved in various litigations which could hinder its overall brand name in the eyes of investors and customers. HP is currently under investigation by the US Securities and Exchange Commission for leaking board-level information to public in 2006. Additionally, such issues forced several of its board members to resign, which could hamper its overall industry goodwill. In 2006, several CNET reporters filed suit against HP over a pretexting scandal. In 2005, HP settled all ongoing patent litigation with Intergraph Corporation, and the companies entered into a patent cross-license agreement. The agreement resolved all legal claims between the two companies. Again in 2007, HP and Acer settled patent litigation. HP also acquired litigations against EDS when it purchased the company in 2008. EDS, now HP Enterprise Services, is a defendant in a lawsuit in the United Kingdom filed by Sky Subscribers Services Ltd and British Sky Broadcasting in 2004. Such litigations and continuous leaking of information by broad members hampers the company’s overall image.

Limited Liquidity HP’s current ratio was 1.22 at the end of 2009 and as low as 0.98 in 2008. This remains below the industry average of 1.56 and 1.47 respectively. A lower than average current ratio

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indicates that the company could be in a weaker financial position than other companies in the industry.

Opportunities Acquisitions/Expansions HP expects to benefit from its acquisitions and expansion plans. In 2008, HP made several corporate acquisitions and expansions. The largest acquisition was Electronic Data Systems, at a cost of 13 billion dollars. This acquisition made HP the second largest producer of large-scale corporate data systems. HP also acquired Colubris Networks Inc., a global provider of intelligent wireless networks for enterprises and service providers. In October 2008, HP announced intentions to expand operations in Chongqing (China) for the manufacture of notebook and desktop PCs for Chinese customers. The company continues to add new products to its portfolio, including high-end digital printers and notebooks with "Touchsmart" technology. HP believes these acquisitions and expansion activities will accelerate growth. IT Outsourcing Many companies continue to outsource IT services, and this trend is expected to grow. IT outsourcing is forecasted to rise over 300 billion dollars in 2010. This global increase is being experienced in many developing markets in India, China, Europe, and North America. HP has positioned itself as an industry leader in IT outsourcing across the world. With HP’s presence in more than 170 countries, they are well positioned to gain a large piece of the outsourcing market.

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Threats Competitive Market HP faces stiff competition in all of its industry markets; competing with other well established corporations such as Dell, IBM, Apple, and Sun Microsystems to name a few. In addition, it faces competition from a large number of new start-up, rapidly growing firms. In the enterprise storage and servers industry, HP faces competition from major competitors in both standard and UNIX-based servers. Competitors in PC production and sales include Dell, Acer Inc, Apple Inc., Lenovo Group Limited, and Toshiba. The major competitors in Imaging and Printing include Canon USA Inc, Lexmark International Inc, Xerox Corp, Seiko Epson Corp, Samsung Electronics Co, and Dell. The ever present competition in these markets could adversely affect HP’s market share and business position. The current global economic slowdown has also shown to be a major factor in product consumption.

Declining PC Market HP is the second largest producer of PCs in the world, with a market share of 19.3%. They generate about one-third of their revenues from the sale of PCs, but only 10% of sales. However, PC sales have declined steadily over the last several years. PC prices (margins) have also been dropping in order to compete with the popular NetBooks and mobile technologies. VALUE-BASED FINANCIAL ANALYSIS AND RECOMMENDATIONS Strategy for Increasing the Company’s Value In conclusion, this paper provides some recommendations for HP to increase the value of their corporation. Following are three recommendations for HP’s consideration:

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Strategic Partnerships. HP recognizes the importance of strategic partnering to take advantage of partner’s strengths. In the case of Compaq and Electronic Data Systems, HP bought them outright in order to take advantage of their service structures. HP may consider the potential benefits of partnering with Amazon, Sony, and Barnes & Noble as a hardware parts supplier to all of the major electronic readers. Profit margins are low in the hardware industry, except for probably in this area. An additional way to address the low product margins is to partner with Apple as a hardware supplier for their continual new lines of iPod, iPhone, iPad, etc. – as Apple sells their hardware at a premium price.

Services. Continuing to focus on services in the foreseeable future, as HP is doing is recommended as there does not appear to be any significant changes in the fundamentals for the IT services market. R&D. Invest in research and development (R&D). HP would do well to create the next iPod, the next Kindle, the next XYZ. A new innovative way to approach R&D investment is to tap the invention market by purchasing a portfolio of patents. Recently in Harvard Business Review an article identified a new multibillion dollar patent firm that sells packages of patents. These packages include 1000’s of patents, some ready to turn into a product and enter quickly into the market; other patents are more risky and may not pay off. However, the firm tries to ensure that a company purchasing a portfolio of patents can reasonable create products along a certain idea and will not end of blind-sided by patent litigation or end up in a hand-tied situation due to missing a critical patent to complete a product as new products are introduced to market.

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