Is Hewlett-Packard a Strong Buy or Value Trap?

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H = Honest Accounting Governs the Company Books?

The main focus of Hewlett-Packard’s fourth quarter earnings release was a development on par with the blue-screen of death. Alleged accounting “improprieties” at its acquired Autonomy software unit led H-P to a one-time accounting charge of $8.8 billion. The charge is linked to the “associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term,” the company explained in a statement.

Along with the “serious accounting improprieties,” there were also “disclosure failures” and “outright misrepresentations” at Autonomy that occurred prior to its acquisition for $11.5 billion in 2011 and were discovered by a nearly seven-month-long internal investigation. The investigation was launched after a senior member of Autonomy came forward, H-P said.

T = Technicals on the Stock Chart are Weak

As the chart below shows, investors have been running away from H-P at an alarming rate. News of the accounting issue sent shares plunging 12 percent in a single day. Year-to-date, shares are down 55 percent and currently near decade lows. Over the past three years, the stock price has been cut by 75 percent. Meanwhile, other major tech companies such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Amazon.com (NASDAQ:AMZN) have all climbed higher.

Conclusion:

Hewlett-Packard is still one of the biggest tech companies in the world, but the company has major red flags. The company has been slow to adapt to a changing industry, and its earnings are in decline. H-P tried to capture growth without proper due diligence, which is now the topic of an accounting scandal. Some may view the company as a value play, but that could have been said several times over the past few months, and shares continue to punish shareholders. Considering the components of our CHEAT SHEET investing framework and the many uncertainties surround the accounting issues, we believe H-P is a STAY AWAY.

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