Top Turnaround Stock For 2014 [Hewlett-Packard Company, Microsoft Corporation, International Business Machines Corp., Intel Corporation]

And HP is finding ways to hedge the decline in PC sales. Although HP’s sales of notebooks and desktops have fallen 20% over the last two years, total revenues have only fallen 11.5% over that time period.

That’s because the server market remains one of the key places that HP can make up the decline in PC sales. At the end of 2013, HP owned 28% of the server market. It overtook IBM, with IBM’s market share was down to 26.5% at the end of 2012, versus 34.9% in 2012.

And an increase in information technology and infrastructure spending by businesses would be a positive a big positive for HP and the server market. This comes as more companies are making the shift to the cloud. Then there’s other opportunities for this turnaround stock, including the potential to enter the 3D printing market.

Despite the massive cuts that it’s made to its workforce, HP still has room for additional cost cutting. Its net margin is in the low single-digits, which is below the high-single digit margin that HP saw a few years ago.

With all that said, is HP a turnaround stock worth owning? Where else are you going to find a company that’s a market share leader and trading at a P/E of only 8.5 based on next year’s earnings?

Even a couple other “old” tech companies trade at a premium to HP. Xerox (NYSE: XRX) has a P/E of 9.4 based on next year’s earnings estimates and Lexmark (NYSE: LXK) is at 11.7. Yet, HP has a return on equity that’s above both these companies.

But do we really need HP’s P/E to rise to make the company a sound investment?

Cash is the real reason investors should take a look at this turnaround stock.

HP is nothing short of a cash flow generating machine. Its free cash flow yield is 13%. Compare that to Apple (NASDAQ: AAPL), which has a free cash flow yield of 7%.

HP has amassed enough cash to cover over 25% of its market cap. And the fact that it is committed to returning over 50% of free cash flow to shareholders should income seeking investors.

HP’s dividend yield is at 1.8%. Although that dividend yield is the same as the S&P 500, it’s only a 20% payout of the company’s earnings. There’s plenty of room for HP to increase its dividend yield. Then there’s also share buybacks.

Last year the company generated $4.30 in free cash flow per share. With HP’s commitment to return 50% of free cash to shareholders, that means $2.15 a share is for investors (either via dividends or buybacks). That kind of return for shareholders represents a 6.6% total annual yield. And doesn’t account for any appreciation in the stock price.

Turnaround stock or not, that kind of total yield isn’t all that bad for a company that has enough cash to cover its debt, and trades at a 40% discount to the S&P 500 on a P/E basis.

This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.

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