Update on Hewlett-Packard and Tim Hortons

As you know, last year I recommended Hewlett-Packard (HPQ) and Tim Hortons (THI). I decided to do an update on these stocks. I'd like to point out, that HPQ has beaten the market while THI has just kept pace. This may make people think that the picks were correct, but that is not what we should look for to see if they were correct. For that, we should go to the facts about the companies and how they are operating.

Let us begin with HPQ. Last year their profits were negative due to $20 billion in non-recurring expenses. If we ignore these expenses they made about $7 billion to $8 billion. $11 billion was for a write down of a terrible acquisition called Autonomy. A lot of people believed they were paying 1999 dot com boom valuations for it. It seems they were right as $11 billion is close to what they paid for it. So they essentially wrote down the entire investment. Then there were charges for layoffs and other restructurings. These seem to be non-recurring so we can reasonable expect HPQ to make $7-$8 billion per year in the long run. That puts the valuation of the company between $70 billion to $80 billion if we assume a P/E ratio of 10 which is typical. As the current valuation is approximately $50 billion you are looking at about a 50% upside and if they can grow earnings it can do better. I am a huge fan of Whitman as she built up the Ebay empire so I think for now HPQ should still be a buy, but of course it is not as undervalued as before. Another reason HPQ is good right now is that there really are not a lot of companies that are undervalued. So I would still recommend it.

Now we must discuss THI. Excellent company that I believe can grow to compete with Starbucks (SBUX). SBUX has profits of $1.3 billion so THI can become that big. As a result I see at least 5 years of growth left at 15-20 percent per year. The company is phenomenal but the profits have been stagnating this last year. The last 4 quarters combined have basically left profits around the same level as the profits of the previous year. Part of that may be the $25 million in non-recurring charges in the last 4 quarters. I would still say to be careful, but I believe THI has another 5 years to go and so would still classify this as a growth stock and give it a buy.

Note I didn't talk too much about stuff that was previously covered. If anything had changed in a major way I would have. These 2 stocks remain a buy for now. Which reminds me, never think that just because a stock has gone up means it cannot go higher, and never think if a stock has gone down it cannot go lower. Bankruptcies prove the latter, and stocks of companies like General Electric prove the former. So just evaluate the business at that time and even if it has gone up a lot, if the price relative to value is low, buy it.