HP: Decent growth, not quite cheap

NEW YORK (Fortune) -- Hewlett-Packard is pulling out healthy growth where others are coming up empty. But investors won't get a free ride.

HP is set to post between 5% and 10% earnings gains this year, while rivals like Dell and Apple are actually posting declines.

HP's diverse business mix is helping. Once mostly reliant on its printer business, HP now is a close second to Dell in terms of U.S. computer sales, and is widening its lead internationally. It also now has a large services unit, thanks in part to this summer's acquisition of Electronic Data Systems.

While a weak economy will hurt HP too, a third of its $120 billion in revenue comes from such recurring streams as printer cartridge sales and long-term service contracts. What's more, HP generates 60% of its revenue outside the United States.

That has helped current investors weather this year's market carnage better than most. Though HP shares are down 30% in 2008, the S&P 500 is on track for a 40% loss. Apple and Dell are down closer to 60%.

The problem for would-be investors: shares aren't quite the bargain that other blue chips are.

On earnings alone, HP looks to be valued at about the same price-to-earnings multiple as Dell. But HP added a significant amount of debt with the EDS acquisition. Strip out debt and add in the cash that both companies have on hand (what investors often call enterprise value), and HP's shares look significantly more expensive than Dell's -- an enterprise value-to-earnings of 8, versus Dell's 5.

"We think Dell is off the charts cheap," says David Katz of asset manager Matrix Advisors, which has recently been buying Dell's shares for its clients, but not HP. "Dell's a lot cheaper than HP."

Nor does HP have the real growth story in the sector. Apple of course has hot products and a smaller market share, giving much more room to grow.

Steady HP may win 2009, but analysts think Apple could boost its earnings on average 22% in 2010. HP's 2010 earnings are only expect to rise 3%.

- Stephen Gandel is a Time senior writer