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Pace of Hewlett-Packard’s Five-Year Plan for Growth Slows Moderately

August 29, 2013 | About:
In October 2012 Hewlett-Packard (HPQ) detailed an in-depth five-year plan that would result in revenue growth matching the rate of U.S. gross domestic product growth in 2016. HPQ continues to guide its corporate strategy from this turnaround plan. However, following the company’s third quarter 2013 earnings announcement it appears its pace of growth might be slightly delayed.

On Aug. 21, 2013, HPQ reported earnings results that met expectations but an outlook that signaled a slower pace of future growth. On a non-GAAP basis earnings per share met analysts’ third quarter 2013 estimate at $0.86. Non-GAAP revenue was $27.2 billion and net income was $1.7 billion. Non-GAAP adjustments for the quarter included amortization, tax, restructuring and acquisition-related charges.

All four major business segments continued to show struggles, resulting in a top-line year-over-year revenue decrease of 8%. Printing and Personal Systems revenue was down 8% year-over-year. Enterprise Group revenue was 9% lower than third quarter 2012. Enterprise Services revenue was also down 9% from third quarter 2012. Software was the only core business group to record a gain, increasing revenue 1% from third quarter 2012.

In Printing and Personal Systems, HPQ promoted Dion Weisler to segment manager. Weisler’s focus for the segment will be on improving revenue and profitability for printing initiatives, hardware and supplies. Personal computer sales will also be a key area of focus for the segment as it seeks to grow market share in the midst of a contracting market for personal computers.

In the Enterprise Group, HPQ has appointed Bill Veghte to lead the segment. Veghte was previously Chief Operating officer for the company. Enterprise Group sales will be a significant area of focus for HPQ as it seeks to capitalize on demand for converged infrastructure, cloud solutions and software-defined data centers. Key product innovation in the segment includes Hewlett-Packard’s Moonshot server platform and its 3PAR storage solution.

Enterprise Services revenue for the quarter was slightly better than expected declining 9% versus an estimated 11%-13%. Strategic enterprise services will continue to be a focus for the segment, providing solutions specifically for cloud, security and big data.

Software was the only core business segment to show profitability gains for HPQ in third quarter 2013. Year-over-year software revenue grew 1% with operating earnings up 15%. Strong growth in security software solutions and database management software solutions such as Vertica contributed to the segment’s profitability for the quarter. Software sales execution will be the segment’s key area of focus in future quarters as it seeks to capitalize on its pipeline and secure additional licensing revenue.

As HPQ moves into the fourth quarter of its “Fix and Rebuild” year, it appears the pace of progression on its five-year plan is slowing. In its third quarter 2013 earnings discussion management indicated the revenue growth expected for 2014, year three of the five-year plan, was unlikely. For the company, that means 2014 will be a critical year. Management initiatives and product growth strategies implemented in 2013 will need to begin paying off in order for the company to reach its long-term goals.

Given the companies 2013 rebuilding year and 2014 challenges it appears to have minimal upside potential in the near-term with a one-year intrinsic value price target1 of $22.40. For investors that means technology funds such as the iShares Dow Jones U.S. Technology ETF (IYW) could be safer alternatives. On a two-year return basis IYW has outperformed HPQ by 40.45%. Over the same time period, the Dow Jones Industrial Average outperformed HPQ by 42.34%. In 2013 and 2014 HPQ product demand increases and execution improvements should be key factors overall for investors considering long-term investment in HPQ.

1 The price target is derived from Bodie, Kane and Marcus’ intrinsic value formula. The intrinsic value formula discounts the stock’s projected one-year future cash flow by the risk-free rate on the one-year Treasury note and includes adjustments made for specific market assumptions including the stock’s beta and market risk premium.

Disclosure: No holdings.


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