Free of the drama of former CEO Hurd's resignation and successful in grabbing 3Par away from Dell (Nasdaq: DELL), it is back to business for Hewlett-Packard (NYSE: HPQ) and its new CEO, Leo Apotheker. Although the valuation on HP shares seems very undemanding, and there is widespread analyst support for the stock, time will tell if investors buy the story and are willing to buy the stock.

IN PICTURES: What Is Your Risk Tolerance?

The Quarter That Was
HP ended its fiscal year with a decent quarter. Revenue rose 8% and slightly exceeded the average analyst estimate. Within the top line, PCs were weak as expected (personal systems revenue was up 4%), while printing (up 8%), servers (up 25%) and services (up 0.4%) were better than generally expected. Software revenue increased 1%, but is far and away the smallest of the company's five major business units.

Profits also came in better than analyst expectations. GAAP net earnings rose 5%, while adjusted earnings were up about 11% and earnings per share exceeded even the high end of the analyst range. Within that, gross margin rose over a full point from last year, while non-GAAP operating margin improved a bit.

The Road Ahead
Much has already been made of HP's new CEO committing to increase the company's R&D spending, and its relatively low investments relative to IBM (NYSE: IBM) and Cisco (Nasdaq: CSCO), though it is in line with Apple's (Nasdaq: AAPL) level of spending. HP certainly has the scale and breadth to leverage more R&D investments, as well as the capital. Investors should remember, though, that R&D does not pay off overnight.

All in all, HP still has several solid product platforms. The company will soon be launching tablets (using ARM Holdings (Nasdaq: ARMH) chips) and that should give the company an opportunity to mitigate the risk that tablets present to the notebook business, though Dell is hoping to do so as well (along with Cisco (the Cius), Research in Motion (Nasdaq: RIMM) (PlayBook) and seemingly every other tech hardware company). Elsewhere, acquisitions like 3Par should help expand the enterprise business, and more could be on the way.

The Bottom Line
Whether investors look at EV/EBITDA, PE or LACFY, Hewlett-Packard shares seem cheap. Oddly enough, though, that is not due to a lack of analyst support. Of the 37 analysts that Thomson lists for HP, 28 have recommendations of "strong buy" or "buy." That suggests, then, that the positive story is out there, but that institutional investors just do not care all that much right now. (For related reading, take a look at Analyst Forecasts Spell Disaster For Some Stocks.)

Although Hewlett-Packard is a middling performer in terms of how much free cash flow it generates from its revenue base, the company has been rather consistent in terms of performance. That makes it rather surprising that the Street is pricing these shares as though free cash flow is only going to grow about 3% a year forever more. Certainly the company will likely not repeat the low-teens sales growth of the past decade or the 20%+ free cash flow growth, but even just a couple of extra points of free cash flow growth over the next 10 years would suggest the shares are undervalued by more than 10%.

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