HP: Not a value trap?

So is it heretical to suggest that you ignore Apple (AAPL) for the moment and give HP (HPQ) shares another shot? That’s what some value investors are saying. And last month they got more ammunition. Bernstein analyst Toni Sacconaghi, who usually grabs headlines for his Apple forecasts, did some number crunching after HP’s shares fell from $49 to $22 and found that HP is cheap — like historically cheap. It’s trading at 5.5 times expected earnings for the next 12 months. No large technology stock — other than that of reeling Blackberry-maker RIM (RIMM) — has traded at that level or below since 1990.

Fortune first reported this story in its Nov. 7th issue. Since then, HP’s stock has jumped 22% to $28. But these value investors still see a stock than can at least grow into the $40s.

Investors’ frustration with HP is pretty easy to dissect. Since former CEO Leo Apotheker took over last November, the company lowered sales forecasts three times. It killed devices for its mobile operating system half a year after excitedly talking up their possibilities. Then in August, Apotheker announced HP’s $10 billion acquisition of software-maker Autonomy that seemed a little too rich to some investors. He followed it up with news that HP was exploring a spinoff of its $41-billion PC business. Which was finally reversed last week, to Wall Street cheers.

Whether his replacement Meg Whitman is the right fit is anybody’s guess. Analysts have wondered whether Whitman, who as CEO of eBay (EBAY) managed the site’s 15,000 employees and its consumer-focused business, can lead HP’s 320,000 employees and the enterprise-focused company.

The value investors buying HP stock say it may not matter. Veteran Wally Weitz thinks at its current share price, the market is saying HP is broken. He sees a solid, albeit banged-up, tech giant with solid recurring cash flows in printers and services. “We’ve tried to get comfort that the individual businesses are good or at least pretty good,” says Weitz. He bought shares in late September, betting on a market overreaction.

Investors Larry Pitkowsky and Keith Trauner of the $70-million GoodHaven Fund (GOODX) also studied HP as shares declined this year. What they found was a company with a No. 1 position in servers and cash-generating businesses in software, services, and printers. They assumed HP’s operating earnings over the past few years should have been 20% less than what was reported, in part because former CEO Mark Hurd was starving the company of R&D to satisfy Wall Street. So instead of almost $5 in operating earnings per share this year, HP will really earn more like $3.50 to $4 per share. That still works out to a mid-single digit price-to-earnings ratio. “What are you risking?” asks Trauner.

Former partners of Bruce Berkowitz at the Fairholme Fund, Pitkowsky and Trauner have long histories buying stocks that others avoid. During last decade’s tech bubble they held insurers and energy companies as the Nasdaq rocketed upward. Their new GoodHaven fund is pounding competitors, rising almost 7% since opening this year.

The two talk about another way to look at price-to-earnings ratios. Instead of dividing price by earnings, you can do the opposite: divide earnings by the stock price. That produces an “earnings yield” and gives investors an idea, in theory, of what each dollar invested should return if earnings never change. HP’s earnings yield is almost 20%.

“In a near zero percent world,” says Trauner, “we think we’re approaching a 20% earnings yield on something where there really is a very large institutional base of business.”

Of course, a high earnings yield is meaningless if earnings fall off a cliff. That would create a value trap as declining businesses get cheaper and cheaper. But from what Trauner and Pitkowsky can tell, HP’s businesses aren’t undergoing permanent declines. The services business contributes almost 40% of profits and is anchored by large, and long-term contracts with customers. HP is borrowing a page from IBM (IBM) and building off its No. 1 position in servers into higher-margin software and services. And even though competitors are beating it in the low-priced printer market, HP is preserving profits by moving into higher-end, higher-margin printing devices.

HP’s taking a $1 billion charge to shut down its mobile operating system’s devices business. But Trauner and Pitkowsky don’t see HP’s cash flows drying up anytime soon. They expect the value of HP to rise over time, and once things are sorted out, the stock to fetch more than $40.

HP stock doesn’t look like it could earn a quick buck like Apple’s. Economic issues in Europe, where it does a lot of business, and sluggish sales in the U.S. are weighing on the company. But that’s exactly why some investors think the stock is a deal today.