Hewlett Packard: A Deep Value Silicon Valley Icon

By now, HP's downfall has been well documented after it announced that it was going to get out of the PC business and seek to acquire Autonomy Corporation plc, the UK-based business intelligence software company, for ~$10 billion. The shuttering of the phone and tablet division it acquired from Palm Inc. merely a year after it paid $1.2 billion for it, and to pay 10x sales for Autonomy with almost all of its remaining cash coffer proved too much for investors and slashed its stock price by ~25% on Aug. 19. Although investors recognized that IBM (NYSE: IBM) had done a great job after selling its PC business to Lenonvo and focused on enterprise software and services, a strategy HP is now pursuing, they do not seem to believe that HP has the management depth to replicate the success of IBM. Investors now see a company in disarray, and its stock price is now down 42% year to date.

Ironically, it turned out Hewlett Packard (NYSE: HPQ) had a big following on its TouchPad after it discontinued the tablet, and slashed its price to $99. Within Hours, many of the TouchPads were gone from BestBuy (NYSE: BBY) and other retailers, leaving many potential customers empty handed.

The same discount may now be happening to HP's stock, even though the enthusiasm is not there for now. With P/E now hovering around 6, and forward P/E only at 5, the stock might have fallen too much, too fast. There's now even talk of takeover of HP, potentially from Oracle (NYSE: ORCL) or IBM (NYSE: IBM). These companies can certainly make use of a lot of the enterprise oriented divisions of HP, and spin off or sell other parts they don't want, and still come out ahead of the $50 billion market capitalization HP currently has. Better yet, if they move now and can stop the Autonomy acquisition, it can retain the $10 billion cash in HP, and the total price will only be $40 billion.

Of course, for any takeover, there has to be a premium and the final price will not be the current market capitalization. HP can also adopt poison-pills to fend off any takeovers. In addition, if the economy enters a double-dip recession, the projected profits may not be there after all. Nonetheless, for investors who see value in HP, they can consider writing puts on the stock. For example, the Jan 2012 $18 put is trading around $0.9 per contract, giving a 5% yield for ~1/2 year. If HP trades at $18/share, its market capitalization will be ~$37 billion, as long as the company does not do any highly dilutive deal. Even for investors who do not believe in HP's ill fate is temporary, it would be good to put it on the radar as HP moves deeper into value stock territory.