What is HP Stock Value?
Hi, I'm quite new to stock trading (done some basic information & reading but still new). I am not able to interpret the way we evaluate the "value of a stock". What is the difference between Rule#1 investors stock value for HPQ (at $6) and this analysis bellow done for HPQ at $39?
posted May 18 '12 by carlesmarx
http://seekingalpha.com/article/601041-why-i-think-hp-is-undervalued] In this article I will run you through my DCF model. In particular I will be using free cash flow to the firm FCFF model to evaluate the stock. Feel free to share your opinion regarding the assumptions I made for this valuation.Let's start with the top line. The company recorded $127.24B revenue in 2011, which represented 1.24% growth Year/Year. In 2010 revenue grew by 9.72% compared with 2009. In 2012, however, I predict that the company will record lower $122.41B revenue, and modest 1.77% recovery in 2013. I predict 2% growth for the next 2 years and no growth for 2 years afterwards.Coming down to the cost side I predict COGS 74%, SG&A 13% and EBIT margin 7.5-8.5% of revenues for the projected period. Interest expense should stay at around 3% of the long-term debt. I forecast taxes to be 22% on average for the projected period.Then I subtract increases in working capital and capital expenditures. I model working capital to increase 10% of the revenue increase per annum. Capital expenditures should stay at 64% of the net income.This model uses WACC to discount FCFF backwards to find out the present value. Beta of this stock is 1.08. I project the WACC to be 6.99%. However, I believe in reality WACC could be higher on average in the long term so I will do further calculations with 10% WACC.To get the value of the firm we need to discount the projected FCFF by WACC and add the terminal value at the end of the 5-year period by calculating a perpetuity with contraction of 2% and 10% WACC.I get the value of equity by subtracting the market value of debt and adding back current cash and marketable securities.Equity value per share is $39.50, which means the stock is 79% undervalued.