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Hewlett-Packard: Don’t Miss the Growth Opportunity

April 11, 2014 | About:
Vinay Singh

Vinay Singh

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I have been quite a big fan of Hewlett-Packard (HPQ)'s new management and the way it has emerged from effects of bad follies and major shift in PC demand. The company has successfully charted a rebound phase under the leadership of Meg Whitman who took over in 2011 after the Autonomy deal debacle. Though the overall revenue has been declining, it can be seen as a part of the larger objectives and stable future that HP is striving to achieve.

The Number Story

Recently, HP reported its fourth quarter and fiscal 2013 results that pushed its share price by almost 9% and reassured investors of a healthy turnaround journey. The quarterly revenue was down by 3% to $29.1 billion while the revenue for entire fiscal 2013 was down 7% year over year. The non-GAAP operating profit for the quarter was up 14% sequentially but on a year-over-year basis, it suffered a decline of 16%. The results were lauded by investors as the Street was expecting a worse result. Additionally, the company delivered diluted EPS at $3.56 for fiscal 2013 in accordance with the high end of its $3.40 to $3.50 per share outlook.

Riding on Innovation

The falling PC demand is no stranger to us and the negative impact it has had on big giants including HP has exceeded expectations. However, the source of relief for HP's management and investors is the constantly improving performance in Printing and Enterprise segments. Besides the credible performance of these divisions, the commercial PC business of the company also saw a growth of 4% in revenue over the prior year. The enthusiastic culture of innovation that has been promoted by CEO Meg Whitman has in a lot of ways enabled HP to establish a firm foothold in the PC industry against all odds.

The Long-Term Bets

As I stated, the printing and Enterprise group business achieved excellent results in the quarter because of improving demand and agile sales force that clinched big ticket deals. The printing numbers were the hallmark of this earnings call as they showed HP's undisputed strength. For instance, it grew at over twice the rate of the rest of the market in the laser printing market. Going forward, printing will be a high focus area for the company because it is responsible for a fifth of HP's revenues and it will be prudent for the management to invest considerable efforts in cost-effective innovation and maintaining brand value.

The Enterprise group did a commendable job in the fourth quarter achieving a growth of 2%, the first increase in eight quarters. The networking and servers saw some good deals in the quarter and established the competitiveness of the company to a certain extent. The innovation with servers has bore sweet fruit and is in alignment with Meg Whitman's plans of working on high utility servers to execute some big wins at competitive prices.

Additionally, storage has been a pivotal point in the turnaround story of HP, especially the converged storage product that achieved a growth of 47% in the quarter. Thus, this is one of the shields that can be effectively used by HP to hedge itself against the headwinds in the PC market.

Small Word of Caution

Even though there are a good number of instances to suggest that HP is progressing well on a revival path, it has to be understood that the core business of HP is still personal computing and the company has to adequately plan on compensating the loss in the PC business. In the fourth quarter, HP saw strength in its consumer PC business mainly because of the educational PC win in the state of Uttar Pradesh in India. The fact that HP has adopted and implemented high-end innovation in its PC products is beyond any doubt but in respect of the numbers for the fourth quarter, it is prudent that investors remain a bit cautious about the performance of this division.

Final Words

I came across a concept in management accounting which states that a business should not be treated as an assimilation of products, but is to be viewed as a combination of various core competencies that generate money for the organization. Now, if we were to imagine HP as a basket of competencies that are in coordination with each other, then I have quite an optimistic feeling about its future operations.

The reason for this optimism stems from the strategies that have been adopted by Meg Whitman and company to create newer competencies with a firm foothold. One big example of this phenomenon is the rise of Enterprise group's share in overall revenues and employment of larger resources for the same. The pursuit of making HP a compact organization by working on cost savings and frugal resource management is nicely complementing the creation of these new competencies.

It is also important to note that all of this has been achieved by HP in its second year of the five-year turnaround plan that had been proposed by the CEO. In my view, HP is regaining the ability to sustain this momentum and things are going to improve in coming years. Hence, it is a suitable time to include Hewlett-Packard in your portfolio.


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