Options Trade – Hewlett-Packard Company (NYSE:HPQ) Calls 
Monday, August 18, 2014

**OPTIONS TRADE: Buy the HPQ Jan 2015 35.000 call (HPQ150117C00035000) at or under $2.20, good for the day. Place a protective stop limit at $0.85 and a pre-determined sell at $4.00.

by Ian Harvey

August 18, 2014

Introduction

Tech giant Hewlett-Packard Company (NYSE: HPQ), a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the Government, health and education sectors, is slated to report 3Q 2014 earnings after the close of trading on Wednesday, August 20th. Results are typically released a few minutes after 4:00 p.m.

Analysts are mostly bullish on Hewlett Packard with zero sell ratings. The company has met or beat earnings estimates the last four quarters, and the forecast for the coming quarterly earnings is $0.89 per share, up from $0.86 during the same period last year. The stock has risen 27.4% on the year.

Technical Details

HPQ was recently trading at $35.30, just $0.91 below its 12-month high and $15.05 above its 12-month low. Technical indicators for HPQ are bullish and the stock is in a strong upward trend. The stock has support above $34.50 and is trading above recent resistance.

Earnings

Hewlett-Packard Company (NYSE:HPQ) last released its earnings data on Thursday, May 22nd. The company reported $0.88 EPS for the quarter, meeting the Thomson Reuters consensus estimate of $0.88. The company had revenue of $27.30 million for the quarter, compared to the consensus estimate of $27.41 billion.

During the same quarter in the prior year, the company posted $0.87 earnings per share. The company’s quarterly revenue was down 1.0% on a year-over-year basis. Analysts expect that Hewlett-Packard Company will post $3.71 EPS for the current fiscal year.

The company also recently declared a quarterly dividend, which is scheduled for Wednesday, October 1st. Stockholders of record on Wednesday, September 10th will be given a dividend of $0.16 per share. This represents a $0.64 dividend on an annualized basis and a yield of 1.84%. The ex-dividend date of this dividend is Monday, September 8th.

Improvements

1. Personal Systems Group’s contribution could go up – the company maintained its lead in the U.S. market and improved significantly in Europe, Middle East and Africa (EMEA) and corporate buying could continue, HP’s new product lineups are likely to perform better thus boosting total revenues.

2. Opportunity in the server market is growing -- as per IT research firm IDC, HP currently leads the overall server market with a 26.5% share, topping IBM’s 19.1%.

3. Software revenues showing signs of stability -- the company has been proactive in expanding footprint in this high-margin business and eventually made some costly acquisitions that have started paying off well. Of late, it’s focusing more on the big data space and has taken part in developing Hadoop architecture to match its competitors’ feat. Moreover, HP could also benefit from its attempt to nurture core product portfolio and improve operational performances of the segment.

4. Further cost improvements possible -- HP expects to cut more jobs in the coming quarters in order to return to profitable growth. The right-sizing will bring down operating costs although the company has to bear certain one-time charges.

Analysts Opinions

Hewlett-Packard Company‘s stock had its “neutral” rating reaffirmed by Zacks in a research note issued to investors on Friday, 18th July. They currently have a $36.00 price target on the stock. Zacks‘s target price would indicate a potential upside of 3.42% from the company’s current price.

Zacks’ analyst wrote, “H-P reported tepid second-quarter results wherein the bottom line matched the Zacks Consensus Estimate but the top line missed the same. H-P’s cost cutting initiatives and improvement in the PC segment remain the positives for the quarter. The company’s traction in the cloud, security and Big Data segments are expected to be the growth catalysts, going forward. We believe that H-P’s strategic focus on the software business will help it to diversify its revenue source which is predominantly dependent on PCs. The company’s probable entry into the 3D printing market should be another growth catalyst given the rapid adoption of 3D technology across industries. Nonetheless, macroeconomic challenges and tepid IT spending remain the near-term concerns. Also, competition from IBM and Oracle should not be discounted. Thus, we reiterate our Neutral recommendation on H-P.”

The company has been the subject of a number of other research reports:-

• Analysts at Deutsche Bank reiterated a “buy” rating on shares of Hewlett-Packard Company in a research note on Tuesday, July 8th.

• Separately, analysts at Mizuho raised their price target on shares of Hewlett-Packard Company from $30.00 to $35.00 in a research note on Thursday, June 12th. They now have a “neutral” rating on the stock.

• Finally, analysts at Goldman Sachs upgraded shares of Hewlett-Packard Company from a “sell” rating to a “neutral” rating in a research note on Thursday, June 12th. They now have a $32.00 price target on the stock, up previously from $25.00.

Of the 19 analysts who cover the stock, eight rate it a "strong buy", one rates it a "buy", nine rate it a "hold", and one rates it a "sell". The stock receives a Standard and Poor's 5 STARS "Strong Buy" ranking.

Conclusion

Hewlett-Packard has enjoyed a break-out year so far, but even with the strong gains the stock remains attractively priced with a P/E of just 12.4, so there is plenty of potential upside in the wake of a positive earnings beat.

The company has a solid track record of posting earnings at least in-line with analyst estimates, having done so each quarter over the last two years. It has outpaced estimates six out of the eight quarters, and has enjoyed year-over-year earnings growth the last two quarters.

The string of upbeat earnings reports has resulted in a steady upwards trend spanning back to the start of 2013 and the stock is showing no signs of slowing down.

A clue can be gleaned as to what to expect from HPQ by looking at recent reports from IBM (IBM) and Accenture (ACN), both of which posted better-than-expected results for their recent quarters. Therefore, expect HPQ to post decent numbers, and with such a low P/E, the stock could make a material move to the upside.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the HPQ Jan 2015 35.000 call (HPQ150117C00035000) at or under $2.20, good for the day. Place a protective stop limit at $0.85 and a pre-determined sell at $4.00.



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