Hewlett Packard: Beware This Blue Chip Value Stock

Reuters reported that Hewlett-Packard (HPQ) recently held unsuccessful talks to acquire software company Tibco Software Inc (TIBX). While both companies are well known technology brands, they are on opposite ends of the valuation spectrum. Hewlett-Packard is developing a following among value oriented investors because the stock trades with a forward P/E of 7.21 and a price/sales of 0.70. TIbco on the other hand has rich valuations. TIBX trades at a forward P/E of 26.46 and a price/sales of 5.74.

This doesn't surprise us considering we wrote about the technology industry's recent aggressive acquisitions in our article, "Merger Mania: The Hidden Risks in Cheap Blue Chip Technology Stocks." But what we find scary is that Hewlett-Packard is looking for another aggressively priced deal so soon after its $2 billion acquisition of 3Par. To make matters worse, a Tibco acquisition would have been at least 3 times the size of the 3Par acquisition, illustrating that Hewlett-Packard's hunger for pricey acquisitions may actually be growing. This is not an indictment of Tibco, which happens to have a strong niche and interesting growth opportunities in cloud computing, it is merely a question of value.

With Hewlett-Packard looking to increase sales in the software division, a segment that contributes around 3% of sales, the potential destruction to shareholder value is substantial. Shareholders may find some solace that the Tibco deal fell through, but even without a premium, HP continues to show that they are willing spenders of shareholder capital.

There is no doubt about it. HP is a cheap company, but for passive minority investors, this stock could be a risky bet if the management continues their 'growth at any price' philosophy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.